FlexiGroup Limited
Annual Report 2009

Plain-text annual report

ABN 75 122 574 583 Annual Report 2009 inside front cover 4.5 inside back cover 2 4 6 8 10 13 Highlights Chairman & CEO’s Report Board of Directors Executive Management Team Operational Report Financial Report IBC Corporate Directory FlexiGroup through its key brands, Flexirent, Certegy and BLiNK, is a leading provider of point of sale services that include lease, interest free, mobile broadband, cheque guarantee and travel loan. ON FlexiGroup has a proven ability to execute and deliver. Certegy was delivered early, and exceeded expectations. BLiNK mobile broadband quickly moved from pilot to launch, driving 17,000 subscriptions. History of FlexiGroup 1995 Harvey Norman Computers first trials Flexirent 2003 Corporatisation process begins with the appointment of new CEO Corporate Directory Directors Margaret Jackson (Chairman) John DeLano (Chief Executive Officer) Andrew Abercrombie Rajeev Dhawan R John Skippen Secretary David Stevens Notice of Annual General Meeting The Annual General Meeting of FlexiGroup Limited will be held at Sofitel Wentworth Sydney, 61 Phillip Street, Sydney at 4.00pm on 26 November 2009 Principal registered office in Australia Level 8, The Forum 201 Pacific Highway St Leonards NSW 2065 Australia Share Register Link Market Services Limited Level 12 680 George Street Sydney NSW 2000 Australia Auditor PricewaterhouseCoopers Darling Park Tower 2 201 Sussex Street Sydney NSW 1171 Australia Solicitors Mallesons Stephen Jaques Level 60, Governor Phillip Tower 1 Farrer Place Sydney NSW 2000 Australia Bankers Commonwealth Banking Corporation Stock Exchange listing FlexiGroup Limited shares are listed on the Australian Securities Exchange Website www.flexigroup.com.au u a . m o c . t c n c e r p i 1 trACK Certegy and BLiNK mobile broadband are an engine for future growth and customer acquisition. Strong volume growth through expansion. Acquisition of a good credit quality business, together with diversifying the range of products with interest free and mobile broadband, has driven growth. 2004 Infrastructure investment and diversification of funding sources 2006 FlexiGroup lists on the Australian Securities Exchange 2007 New Flexirent Advantage product is released FY2009 Expansion through acquisition (Certegy) and product innovation (BLiNK mobile broadband) 2 FLEXIGROUP LIMITED ANNUAL REPORT 2009 Highlights Net Profit After tax (NPAt) of $33.5 million,1 an increase of 4% over Fy2008 Strong volume growth of 41% to $417.6 million 2H2009 transaction volumes increase by 150% on 2H2008 StreNgtH iN diverSit y NPAT ($million) 12.3 22.7 FY2005 FY2006 3 Funding maintained through global financial crisis – funders provide $200 million for Certegy 90 day arrears remain stable during the last 18 months due to early tightening of credit criteria dividend of 6.0 cents per share (fully franked) StreNgtH iN diverSit y 29.3 32.3 33.5 FY2007 (pro forma) FY2008 FY20091 1 Excludes Certegy intangible amortisation of $0.7 million. 4 FLEXIGROUP LIMITED ANNUAL REPORT 2009 Chairman & CeO’s report W e have great pleasure in presenting the FlexiGroup Annual Report for the year ended 30 June 2009. We are pleased to announce a record Net Profit After Tax (“NPAT”) of $33.5 million,1 an increase of With Certegy’s interest free products offered to homeowners in sectors such as swimming pools, solar systems, water heaters, sheds and jewellery, the number of merchants that offer a FlexiGroup lease or interest free product has doubled to more than 10,000 across Australia, New Zealand and Ireland. FlexiGroup’s latest product is BLiNK, a mobile broadband product that complements the Flexirent computer lease offer, where a high proportion of transactions are for a Notebook or a Netbook. Following a pilot phase and after securing an agreement with Optus, BLiNK was launched in February in Harvey Norman, Bing Lee, The Good Guys and independent retailers. The product has been well received with over 17,000 subscribers connected to the BLiNK service by year end. By leveraging the business model and infrastructure, FlexiGroup is well placed to take a share of the fast growing mobile broadband market (which according to market analysts is growing at +100,000 subscribers a month). Existing retailer relationships provide a readily accessible distribution channel, and the product is well received as the FlexiGroup contact centre delivers a high level of service through quick activation of the BLiNK service while the customer is in store. Both Certegy and BLiNK mobile broadband complement FlexiGroup’s existing business model and distribution channels. Combined, they should be a strong contributor to the Group’s future net profit growth while successfully diversifying FlexiGroup’s product offering beyond the IT & Electrical sectors. FlexiGroup has been conservatively managed through the economic crisis. Early tightening of the credit criteria in late 2007 and the decision to curtail the personal loan product in early 2008, while resulting in some contraction of loan and lease volumes, has resulted in credit losses remaining at satisfactory levels. The overall result of NPAT growth outpacing receivables growth was pleasing, with Certegy and BLiNK mobile broadband driving FY2009 volume growth of 41%. 4% over FY2008 and ahead of the initial guidance for FY2009 of $28–$30 million. The past year has been one of significant progress with FlexiGroup achieving several overall highlights: • • • • • NPAT guidance of $28m–$30m, provided when the Certegy acquisition was announced, was exceeded as synergies from the acquisition were realised earlier than expected. Blink mobile broadband was a new source of income and delivered 17,000 subscribers. 90-day arrears have been stable during the last 18 months due to early tightening of credit criteria. NPAT growth outpaced receivables, driven by increased non-interest income from new product initiatives. Funding maintained through the global financial crisis and funders provided $200 million in funding for Certegy. Against the background of the world financial crisis, FlexiGroup has successfully controlled bad debts, maintained its funding sources and expanded its business through a strategy of acquisition and product diversification. The October 2008 Certegy acquisition and subsequent integration of the business was well executed, with business synergies realised earlier than anticipated. As a result market guidance was exceeded with NPAT1 contribution of $0.2 million compared to original expectations of negative $1.5 million. This is a particularly pleasing result as the Certegy operating business was acquired without the receivables portfolio or revenue base from its previous owner. In just 9 months, the receivables portfolio was built to a level where the business produced a profit. Two of FlexiGroup’s funders provided $200m to fund the growth of the Certegy business, showing strong support of the business model, during a period of tight global liquidity. 1 Excludes Certegy intangible amortisation of $0.7 million. 5 results are ahead of expectations and we believe sound growth opportunities for future years have been provided. With good management, new products and the acquisition of a good credit quality business, we believe the Group has achieved the right balance of prudence and expansion. Results are ahead of expectations and we believe sound growth opportunities for future years have been provided. The Directors were pleased to declare a fully franked dividend of 3.0 cents per share which had a record date of 16 September 2009 and was paid on 15 October 2009. For the year a fully franked dividend of 6.0 cents per share was paid. We would like to take this opportunity to thank the management team and staff for their contribution to the excellent results achieved for FY2009. We appreciate the talent and hard work that was required to integrate the Certegy business, deliver a broadband product and maintain a focus on delivering to the expectations of the existing business. We look forward to ensuring that we remain a leading provider of point-of-sale finance as well as establishing our share of the mobile broadband market through retail outlets. Magaret Jackson Chairman John DeLano Managing Director and CEO 6 FLEXIGROUP LIMITED ANNUAL REPORT 2009 Board of directors BOArd OF direCtOrS from left to right Margaret Jackson Chairman, Independent, Non-Executive Director John DeLano Non-Independent, Executive Director, Chief Executive Officer Andrew Abercrombie Non-Independent, Non-Executive Director R John Skippen Independent, Non-Executive Director Rajeev Dhawan Independent, Non-Executive Director 7 8 FLEXIGROUP LIMITED ANNUAL REPORT 2009 executive Management team SOLid LeAderSHiP teAM from left to right John DeLano Managing Director and CEO Garry McLennan Chief Financial Officer Pearl Laughton Chief Information Officer Doc Klotz Head of Operations Marilyn Conyer Head of Marketing David Stevens Financial Controller and Company Secretary Grace Silvio Head of Human Resources Neil Roberts Head of National Sales and Business Development 9 10 FLEXIGROUP LIMITED ANNUAL REPORT 2009 Operational report 223,625 transactions $418 million volume $540 million total receivables certegy ezi-pay Leases and loans Mobile broadband Interest free FY2009 2H2009 (February 2009 launch) FY2009 (acquired October 2008) 98,635 transactions $224 million volume 16,854 subscriptions 108,136 transactions $195 million volume 11 volume growth for Fy2010 is expected BLiNK mobile broadband penetration of retail channels is set to increase and the Certegy receivables portfolio will continue to grow, reaching a steady state in January 2010. It is anticipated that lease volumes will remain flat while a cautious approach to credit is maintained. It is expected that Certegy’s NPAT contribution will increase while BLiNK is not predicted to contribute until FY2011 due to subscriber acquisition costs. BLiNK plans and offers will continue to be expanded and FlexiGroup will continue to develop new products, with both finance and telco related products in the pipeline. Fy2009 transactions grew by 103% Certegy & BLiNK mobile broadband accounted for 64% of transaction volume in the second half. To represent the business going forward, FlexiGroup Limited has been adopted as the main trading name, replacing Flexirent Capital Pty Ltd. Following the acquisition of Certegy in October 2008 and the launch of BLiNK mobile broadband in February 2009, the three key business streams are: • Leases and loans • Mobile Broadband • Interest free. FlexiGroup is about talented people delivering outstanding service. We make it easy for our retailers by authorising agreements and paying their invoices as quickly as possible. We take pride in a 100% commitment to quick turnaround times. What other finance company achieves 60% of invoices settled on the day the application is approved? Samantha Delaney Flexirent Settlements Team Leader (Australian Telecommunication Association – 2009 National Team Leader of the Year) NPAt increased due to acquiring sound credit volume and by growing other income Fee and other income of $73.6 million was 54% of operating income, an increase of 29% over the prior year. A number of product initiatives contributed to this growth including: • Interim rental • Protect income • End of term income (includes the asset sale) • Certegy fees (delivered early) • BLiNK mobile broadband income Volume growth, combined with a number of these initiatives, contributed to underlying operating cash of $67.3 million1, growth of 31% over the prior year. Lease and loan losses declined in the second half of the year due to the run-off of the personal loan portfolio and with lease losses remaining flat. The products financed by the Group are for customers’ day-to-day usage. The asset price is generally low and repayments are therefore affordable, which has contributed to stable lease losses and arrears. Collections can be a tough place to work – particularly in the midst of a global financial crisis. At Flexirent we have a unique approach to recoveries. With an understanding approach we tailor solutions to the customer’s financial situation and, thanks to prudent management of credit and collections policy, we are delighted to have reported a decline in lease and loan losses. Jeff McLean Head of Collections (2009 Australian Institute of Credit Management NSW Young Credit Professional of the Year) 1 Underlying cash flow reflects the cash generated prior to cash deposited in loss reserves, self funding of loans, leases and lease periods and timing differences relating to asset payments. 12 FLEXIGROUP LIMITED ANNUAL REPORT 2009 Mobile Broadband is described by industry experts as an ‘explosive category’ Blink Adding BLiNK mobile broadband to our portfolio of services is a natural complement to the growing laptop/ netbook category and builds on the relationships already in place. There are many mobile broadband providers, but only BLiNK subscribers will be sent a computer if theirs needs fixing. We call it a ‘Loaner’. Recently released BLiNK Freedom is an interest free lease that lets customers choose their laptop and mobile broadband solution for one low monthly payment. BLiNK mobile broadband uses the latest OPTUS dual band network and broadband infrastructure. I can’t believe how easy it was to get activated – all done in one quick phone call from the store. Great value too. Blink Customer the Certegy ezi-Pay interest free product provides an easy and transparent retail finance option Certegy Ezi-Pay The Certegy Ezi-Pay interest free product is a direct debit payment plan with no interest ever to the consumer. Ezi-Pay Advantage is an integral part of the business. As a selling tool it allows us to increase our average sale price as well as create incremental sales. The process is quick and easy, needing little time to complete at point of sale. For our customers, completing an Ezi-Pay application is non-invasive, with a simple criteria. Albert Bensimon Shiels Jewellers Managing Director It is offered by approximately 5,600 merchants across a range of diverse industries (home improvement, furniture, jewellery, medical and leisure). Approximately 750,000 consumers have used Certegy Ezi-Pay since it was established in 2000. Finding the right fit finance provider for our product, demographic and in-home sales process was not easy, though in early stages we have been very happy with our initial sales results. With 20% of our customers using Ezi-Pay, our agents have shown us that it is a product that works for in-home sales. John Kuchel Director The Smartt Group (Solar Products) Flexirent Lease and loan products are offered in IT, electrical and travel channels in Australia, New Zealand and Ireland. Product innovations such as Loaner, Protect and BLiNK mobile broadband provide scope to renew and refresh the Flexirent lease products. includes unique Loaner and Protect services that customers appreciate I was impressed with how fast it was, within 24 hours of it being stolen I had a new plasma. My claim was authorised in one phone call. I will recommend Flexirent to everyone. Flexirent Customer Loaner and Protect provides temporary or permanent replacement of equipment if it needs repair or is damaged, lost or stolen. When Flexirent customers choose to include BLiNK mobile broadband, they receive it at half price, providing long lasting value in their Flexirent deal. Great value. I really like Loaner and Protect and I got the BLiNK mobile broadband plan at half price because I included it in my Flexirent deal. Flexirent and Blink Customer 13 Financial Report As at 30 June 2009 Contents Directors’ Report Auditor’s Independence Declaration Corporate Governance Annual Financial Report Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder Information Page 14 36 37 41 46 88 89 91 14 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Directors’ Report As at 30 June 2009 Your Directors present their report on the consolidated entity (referred to hereafter as the Group) consisting of FlexiGroup Limited and the entities it controlled at the end of, or during, the year ended 30 June 2009. Directors The following persons were Directors of FlexiGroup Limited during the year and up to the date of this report: Margaret Jackson John DeLano Andrew Abercrombie Rajeev Dhawan R John Skippen Company Secretary David Stevens was appointed as Company Secretary on 27 August 2008 and continues in office at the date of this report. Paul McMahon was the Company Secretary from the beginning of the financial year until his resignation on 27 August 2008. Principal activities The principal activities during the year continued to be the provision of: • lease and rental financing services for office, personal technology and related equipment • personal and business loans No significant change in the nature of these activities occurred during the year. Dividends Review of operations The Group’s net profit after tax for the year ended 30 June 2009 was $32.8m (2008: $32.3m). The Group has focussed on acquiring good credit quality business and diversifying its product range. The early tightening of credit criteria in late 2007 and the decision to curtail the personal loan product in early 2008, while resulting in some contraction of loan and lease product volumes, has resulted in credit losses remaining at satisfactory levels. During the year the Group acquired the Certegy Australia and New Zealand businesses from Fidelity National Information Services Inc. Certegy is a leading provider of interest free finance. The Group acquired the Certegy business, however didn’t acquire the receivables portfolio, therefore the receivables portfolio has been built up from a zero base. As a result, Certegy’s net profit after tax and before amortisation for the period since acquisition was $0.2m. FlexiGroup is well placed to take a share of the fast growing mobile broadband market after securing an exclusive agreement with Optus and launching its BLiNK Mobile Broadband in Harvey Norman, Apple, Bing Lee and The Good Guys and many independent retailers. Significant changes in state of affairs There were no significant changes in the Company’s state of affairs in the year. Matters subsequent to the end of the financial year There were no matters subsequent to the end of the financial year. Dividends paid to members during the financial year were as follows: Likely developments and expected results of operations A special ordinary dividend of 3 cents per fully paid share was paid on 9 December 2008. The total amount paid was $6,897,232. Interim ordinary dividend for the year ended 30 June 2009 of 3 cents (2008: 5.5 cents) per fully paid share paid on 15 April 2009. Total amount paid was $7,122,232. The Directors declare a final ordinary dividend of 3 cents per fully paid ordinary share on 19 August 2009. This dividend has a record date of 16 September 2009 and is expected to be paid on 15 October 2009. Information on likely developments in the operations of the consolidated entity and the expected results of operations have not been included in this report because the Directors believe it would be likely to result in unreasonable prejudice to the consolidated entity. Environmental regulation The Group’s operations are not regulated by any significant environmental regulation under a law of the Commonwealth or of a State or Territory. 15 Information on Directors Margaret Jackson, AC (Age 56) Chairman, Independent, Non-Executive John DeLano (Age 49) Non-Independent, Executive, Chief Executive Officer BEc, MBA, Hon LLD (Monash), FCA BA Experience John has been Chief Executive Officer of the Company since December 2006, and was appointed a Director of the Company in November 2006. John has been Chief Executive Officer of Flexirent Holdings Pty Limited since September 2003. John started his career with Avis Inc. in the United States before progressing to the position of Managing Director of Avis Australia. John was subsequently involved as Senior Vice President of Operations with Travel Services International, a NASDAQ listed Company which successfully completed a roll-up of 23 leisure travel companies. Other current directorships None Former directorships in last three years None Special responsibilities Chief Executive Officer Interests in shares and options 3,141,656 ordinary shares in FlexiGroup Limited Experience Margaret was appointed a Director of the Company in November 2006. Margaret is also a Director of Billabong International Limited. Margaret is also Chair of the Steering Committee for the National Long-Term Tourism Strategy, Chairman of the Asia Pacific Business Coalition on HIV/AIDS, Chairman of the Ponting Foundation, President of Australian Volunteers International and Chairman of the New Life Campaign (Salvation Army). Before beginning her career as a full time company Director in 1992, Margaret was a Partner of KPMG Peat Marwick’s Management Consulting Division. Other current directorships Billabong International Limited Former directorships in last three years Australia and New Zealand Banking Group Limited Qantas Airways Limited Special responsibilities Member of Remuneration Committee, Nomination Committee and Audit & Risk Committee Interests in shares and options 2,880,549 ordinary shares in FlexiGroup Limited Andrew Abercrombie (Age 53) Non-Independent, Non-Executive BEc, LLB, MBA Experience Andrew became a Director of the original Flexirent business in 1991. He was appointed a Director of the Company in November 2006. Andrew is an experienced commercial and tax lawyer and was a founding partner in a legal firm operating in both Sydney and Melbourne. Following several years in property investment and tax consulting, he became involved in the Flexirent business in 1991 and until 2003 was Chief Executive Officer. Other current directorships None Former directorships in last three years None Special responsibilities Chair of Nomination Committee and Member of Remuneration Committee Interests in share and options 75,012,278 ordinary shares in FlexiGroup Limited 16 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Directors’ Report continued Rajeev Dhawan (Age 43) Independent, Non-Executive R John Skippen (Age 61) Independent, Non-Executive BCom, ACA, MBA ACA Experience Rajeev represented Colonial First State Private Equity managed funds (“CFSPE”) on the Board of Flexirent Holdings Pty Limited from February 2003 to December 2004. Upon CFSPE’s exit from Flexirent Holdings in December 2004, Rajeev continued in an advisory capacity to the Flexirent business. Currently a partner of Equity Partners, Rajeev has 16 years’ venture capital and private equity experience and has been a Director of a number of listed and unlisted portfolio companies. Other current directorships Snowball Group Limited Traffic Technologies Limited Former directorships in last three years Portland Orthopaedics Limited (alternate director) Special responsibilities Chair of Remuneration Committee, Member of Audit & Risk Committee and Nomination Committee Interests in shares and options 820,706 ordinary shares in FlexiGroup Limited Experience John was appointed a Director of the Company in November 2006. John was the Finance Director and Chief Financial Officer of Harvey Norman Holdings Limited for 12 years. John was involved in the establishment of the original agreement between Flexirent Holdings Pty Limited and Harvey Norman in 1995. John has over 30 years’ experience as a chartered accountant. Other current directorships Briscoe Group Limited (New Zealand) Super Cheap Auto Group Limited Former directorships in last three years Harvey Norman Holdings Limited Rebel Sport Limited Pertama Holding Limited (Singapore) Courts (Singapore) Limited Mint Wireless Ltd Special responsibilities Chair of Audit & Risk Committee, Member of Remuneration Committee and Nomination Committee Interests in shares and options 378,533 ordinary shares in FlexiGroup Limited 17 Meetings of Directors FlexiGroup Limited Scheduled Board meetings Unscheduled Board meetings Audit & Risk Committee Nomination Committee Remuneration Committee Held Attended Held Attended Held Attended Held Attended Held Attended M Jackson J DeLano A Abercrombie R Dhawan R J Skippen 12 12 12 12 12 12 12 10 11 12 3 3 3 3 3 + Not a member of the relevant committee. Company Secretary The Company Secretary is David Stevens. David was appointed to the position of Company Secretary in August 2008. David has over 10 years’ experience in financial services and professional services. Remuneration Report The remuneration report is set out under the following main headings: A. Principles used to determine the nature and amount of remuneration B. Details of remuneration C. Service agreements D. Share-based compensation – FlexiGroup Limited arrangements E. Additional information The information provided in this remuneration report has been audited as required by section 308(3C) of the Corporations Act 2001. A. Principles used to determine the nature and amount of remuneration The objective of the Group’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive rewards with achievement of strategic objectives and the creation of value for shareholders and conforms to market best practice for delivery of reward. The Board ensures that executive remuneration satisfies the following key criteria for good reward governance practices: 3 3 3 3 3 • • • • • 6 + + 6 6 6 + + 5 6 – – – – – – – – – – 5 + 5 5 5 5 + 4 5 5 competitiveness and reasonableness acceptability to shareholders performance linkage/alignment of executive compensation transparency capital management In consultation with external remuneration consultants, the Group has structured an executive remuneration framework that is market competitive and complementary to the reward strategy of the organisation. Alignment to shareholders’ interests: • • has economic profit as a core component of plan design focuses on sustained growth in shareholder wealth as measured by growth in earnings per share and other financial and non-financial performance indicators • attracts and retains high calibre executives Alignment to program participants’ interests: • • • • rewards capability and experience reflects competitive reward for contribution to growth in shareholder wealth provides a clear structure for earning rewards provides recognition for contribution The framework provides a mix of fixed and variable pay, and a blend of short and long-term incentives. As executives gain seniority with the Group, the balance of this mix shifts to a higher proportion of “at risk” rewards. 18 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Directors’ Report continued Non-Executive Directors Fees and payments to Non-Executive Directors reflect the demands that are made on, and the responsibilities of, the Non-Executive Directors. Non-Executive Directors’ fees and payments are reviewed annually by the Board. Non-Executive Directors do not receive share options. Non-Executive Directors may opt each year to receive a percentage of their remuneration in FlexiGroup Limited shares which would be acquired on-market. Shareholders approved this arrangement on 20 November 2006 but no Directors have as yet elected to participate in the arrangement. Non-Executive Directors’ fees The current base remuneration was set when the Company listed on 12 December 2006. Non-Executive Directors’ fees are determined within an aggregate Directors’ fee pool limit of $1.2 million. The following fee structure has applied since listing: Base fees (per annum) M Jackson (Chairman) A Abercrombie Other Non-Executive Directors Additional fees (per annum) Audit & Risk Committee – Chairman Nomination Committee – Chairman Remuneration Committee – Chairman $150,000 $120,000 $80,000 $10,000 $10,000 $10,000 In addition to the above fees, Directors also receive superannuation contributions required under government legislation. A Director is entitled to reimbursement for reasonable travelling, accommodation and other expenses in attending meetings and carrying out their duties. Under clause 10.11 of the Company’s constitution, subject to the Listing Rules and Corporations Act, the Company may pay a former Director, or the personal representatives of a Director who dies in office, a retirement benefit in recognition of past services of an amount determined by the Directors. The Company may also enter into a contract with a Director providing for payment of the retiring benefit. No such contracts have been entered into to date. Despite having this clause in the Company’s constitution, the Company does not intend to pay such benefits to Directors. Executive pay The executive pay and reward framework has four components: • • base pay and benefits short-term performance incentives • long-term incentives through participation in the FlexiGroup Long Term Incentive Plan, and • other remuneration such as superannuation The combination of these comprises the executive’s total remuneration. Base pay Executives are offered a competitive salary that comprises the components of base pay and benefits. Base pay for senior executives is reviewed annually by the Remuneration Committee to ensure the executive’s pay is competitive with the market. An executive’s pay is also reviewed on promotion. Short-term performance incentives Short-term performance incentives (“STIs”) vary according to individual contracts; however for senior executives they are broadly based as follows: • • A component of the STI is linked to the individual performance of the executive (this is based on a number of factors, including performance against budgets, achievement of Key Performance Indicators (“KPIs”) and other personal objectives). A component of the STI is linked to the financial performance of the business or measured against budgets determined at the beginning of each financial year. All STI payments to senior executives are approved by the Remuneration Committee and are usually paid in late August or early September of the following financial year. Using various profit performance targets and personal performance objectives assessed against KPIs, the Company ensures variable reward is only paid when value has been created for shareholders. For middle and lower level management, total STIs are linked to individual performance measures and also to the financial performance of the business. The short-term bonus payments may be adjusted up or down in line with under or over achievement against the target performance levels. This is at the discretion of the Remuneration Committee. The STI target annual payment is reviewed annually. Long-term incentives Long-term incentives to the Chief Executive Officer and certain senior employees are provided via the FlexiGroup Long Term Incentive Plan. Information on the plan is detailed in Section D of this report. 19 B. Details of remuneration Amounts of remuneration Details of the remuneration of the Directors and the Key Management Personnel (as defined in Australian Accounting Standards Board (“AASB”) 124 Related Party Disclosures) of FlexiGroup Limited and its subsidiaries are set out in the following tables. The cash bonuses are dependent on the satisfaction of performance conditions as set out in the section headed Short-term performance incentives above. The Key Management Personnel of FlexiGroup Limited are the Directors and certain executives that report directly to the Chief Executive Officer. This includes the five FlexiGroup executives who received the highest remuneration for the year ended 30 June 2009. The following amounts were paid to the Key Management Personnel during the 2009 year as part of their ongoing remuneration: 2009 Name Short‑term employee benefits Post‑ employment benefits Cash salary and fees $ Cash bonus $ Super‑ annuation $ Long‑term benefits Share‑based payments Options, performance rights and deferred shares $ Long service leave $ Non‑Executive Directors of FlexiGroup Limited 150,000 130,000 90,000 90,000 – – – – 13,500 11,700 8,100 8,100 – – – – – – – – Total $ 163,500 141,700 98,100 98,100 M Jackson (Chairman) A Abercrombie R Dhawan R J Skippen Executives of FlexiGroup J DeLano Director and Chief Executive Officer G McLennan* Chief Financial Officer N Roberts Head of National Sales D Klotz Head of Operations P Laughton Chief Information Officer P McMahon** Chief Financial Officer 514,388 618,500 35,612 3,314 461,629*** 1,633,443 258,028 253,125 23,223 – 70,316 604,692 327,473 131,000 20,155 514 177,866 657,008 331,658 144,500 22,700 199 233,525 732,582 243,303 175,582 26,496 558 121,008 566,947 90,110 23,437 5,161 – (190,200)** (71,492) 2,224,960 1,346,144 174,747 4,585 874,144 4,624,580 * ** G McLennan commenced employment on 1 October 2008. P McMahon terminated employment on 31 August 2008. Share-based payment expenses for the years ended 30 June 2007 and 30 June 2008 of $69,734 and $120,466 respectively were credited due to options held by P McMahon being forfeited. *** In addition to the above there is a share-based payments expense arising from options issued to J DeLano of $482,935 by the former shareholders of Flexirent Holdings Pty Limited. Refer to page 24 for further details of this arrangement. 20 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Directors’ Report continued The following amounts were paid to the Key Management Personnel during the 2008 year as part of their ongoing remuneration: 2008 Name Short‑term employee benefits Post‑ employment benefits Cash salary and fees $ Cash bonus $ Super‑ annuation $ Long‑term benefits Share‑based payments Long service leave $ Options and performance rights $ Non‑Executive Directors of FlexiGroup Limited M Jackson (Chairman) A Abercrombie R Dhawan RJ Skippen Executives of FlexiGroup 150,000 130,000 90,000 90,000 – – – – 13,500 11,700 8,100 8,100 – – – – – – – – Total $ 163,500 141,700 98,100 98,100 J DeLano Director and Chief Executive Officer P McMahon Chief Financial Officer N Roberts Head of National Sales D Klotz Head of Operations P Laughton Chief Information Officer 521,552 300,000 35,612 5,496 380,909* 1,243,569 344,037 140,625 54,186 1,007 120,466* 660,321 327,473 74,375 32,234 169 121,257 555,508 263,262 124,154 11,068 74 198,744 597,302 271,882 105,692 25,847 237 43,920 447,578 2,188,206 744,846 200,347 6,983 865,296 4,005,678 * In addition to the above there is a share-based payments expense arising from options issued to J DeLano and P McMahon of $533,272 and $76,182 respectively by the former shareholders of Flexirent Holdings Pty Limited. Refer to page 24 for further details of this arrangement. As a result, the total Director and Key Management Personnel compensation for 2009 and 2008 was as follows: Cash salary and fees Cash bonus Post-employment benefits – superannuation Long service leave 2009 $ 2008 $ 2,224,960 2,188,206 1,346,144 174,747 4,585 744,846 200,347 6,983 Share-based payments expense – options, performance rights and deferred shares 1,357,079 1,474,750 5,107,515 4,615,132 21 The relative proportions of ongoing remuneration that are linked to performance and those that are fixed are as follows: Fixed remuneration At Risk – STI At Risk – LTI 2009 % 2008 % 2009 % 2008 % 2009 % 2008 % Name Executives of FlexiGroup J DeLano Chief Executive Officer G McLennan* Chief Financial Officer N Roberts Head of National Sales D Klotz Head of Operations P Laughton Chief Information Officer P McMahon 34 47 53 48 48 45 N/A 65 46 66 61 38 42 20 20 31 N/A 24 N/A 13 21 24 21 28 11 27 32 21 N/A 31 N/A 22 33 10 18 Chief Financial Officer N/A * G McLennan commenced employment on 1 October 2008. N/A – Not a Key Management Personnel in the respective year, or no longer an employee. C. Service agreements Remuneration and other terms of employment for the Chief Executive Officer and the other Key Management Personnel are formalised in service agreements. Each of these agreements can provide for the provision of short-term performance incentives, eligibility for the FlexiGroup Long Term Incentive Plan (“LTIP”), other benefits including the use of a Company motor vehicle, tax advisory fees, payment of benefits forgone at a previous employer, relocation, living, tax equalisation, travel and accommodation expenses while an executive is required to live away from their normal place of residence. All employment agreements are unlimited in term but capable of termination on up to three months’ notice by either the Company or the executive. The Company can make a payment in lieu of notice. In the event of retrenchment, the executives listed in the table on page 19 are entitled to the payment provided for in the service agreement. The employment of the executives may be terminated by the Company without notice by payment in lieu of notice. The service agreements also contain confidentiality and restraint of trade clauses. D. Share-based compensation – FlexiGroup Limited arrangements The FlexiGroup Long Term Incentive Plan (“LTIP”) is part of FlexiGroup’s remuneration strategy and is designed to align the interests of FlexiGroup management and shareholders and assist FlexiGroup in the attraction, motivation and retention of executives. In particular, the LTIP is designed to provide relevant executives with an incentive for future performance, with conditions for the vesting and exercise of options and performance rights under the LTIP encouraging those executives to remain with FlexiGroup and contribute to the future performance of the Group. The Company’s founding shareholders approved the terms, the implementation and the operation of the LTIP on 20 November 2006. Under the LTIP, eligible persons participating in the LTIP may be granted options and/or performance rights on terms and conditions determined by the Board from time to time. An option and a performance right are both rights to acquire a share, subject to the satisfaction of applicable vesting and/or exercise conditions. The main difference between an option and a performance right is that an exercise price as determined by the Board is required to be paid to exercise a vested option, whereas a performance right has nil exercise price unless otherwise determined by the Board. Options and performance rights granted under the plan carry no dividend or voting rights. 22 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Directors’ Report continued The Board is responsible for administering the LTIP in accordance with the LTIP Rules and the terms and conditions of specific grants of options and/or performance rights to participants in the LTIP. The Board may determine which persons will be eligible to participate in the LTIP from time to time. Eligible persons may be invited to apply to participate in the LTIP. The Board may in its discretion accept such applications. The terms and conditions of the options and the performance rights are summarised below. Details of the options Instrument Exercise price Each option represents an entitlement to one ordinary share. Determined at the time of invitation and payable by the option holder at the time of exercise. Vesting conditions Vesting to occur upon the satisfaction of the EPS and KPI performance conditions as summarised in this table and on page 23. EPS performance target Following the satisfaction of the performance hurdles described below, the options comprising each tranche will vest on, and become exercisable on or after, the relevant vesting date. The basic EPS (“Basic EPS”) for the purpose of the options is equal to 13.0 cents per share, being the pro forma forecast earnings per share of FlexiGroup for FY2007 as calculated under AASB 133 less the share-based payments expenses (as determined under AASB 2) relating to the grants of options over shares from Eighth SRJ Pty Limited and Viewlove Pty Limited (former shareholders of Flexirent Holdings Pty Limited) to certain senior executives of the Group and adjusted for extraordinary items as determined by the Board. Performance testing (“testing date”) against the EPS hurdle will take place on the date of announcement of the relevant annual financial results of FlexiGroup. For some but not all tranches, retesting will occur at the retesting date in respect of the next financial year-end date immediately following the relevant initial testing date. Options that do not vest on retesting will be taken to have lapsed. The applicable EPS hurdle for each test period is measured on an annual compounding basis to the relevant performance test date, using the Basic EPS as the base line number. The Board has the discretion to vary at any time the EPS hurdle applicable to all or part of the options. Why the EPS performance target was chosen EPS was chosen as a performance condition as it is aligned to earnings growth and the generation of value to shareholders. KPI performance target The KPI hurdles may include any combination of operational, volume and product mix, cultural, financial and other measures as determined and modified by the Board from time to time. In the case of FY2009, the relevant KPI hurdles were determined by the Board. The KPI hurdles will be performance tested against those measures over each relevant financial year unless otherwise determined by the Board. In determining whether the KPI performance hurdles have been satisfied, a report is prepared for the Remuneration Committee detailing each KPI performance hurdle and the performance of the executive against the hurdle. The Remuneration Committee approves that rating for all KPI performance hurdles. Why the KPI performance target was chosen KPI hurdles were included in the determination of awarding options to ensure that financial and non-financial measures are aligned and drive shareholder value. 23 Vesting date Following the satisfaction of the performance hurdles applying to an option, the option vests on, and becomes exercisable on or after, a date predetermined by the Board (“vesting date”). The vesting date is effectively the tenure condition. It means that an option holder may only exercise options that vest following the satisfaction of the applicable performance hurdles on or after the vesting date provided that they remain employed by FlexiGroup as at this date. If an option holder ceases to be employed by FlexiGroup or any of its subsidiaries for any reason on or prior to the vesting date relating to a tranche of options, all options in the tranche will lapse immediately unless the Board makes a determination that those options have vested. Following the vesting date or the accelerated vesting of an option, the vested option may be exercised by the executive subject to any exercise conditions and the payment of the exercise price (if any), and the executive will then be allocated or issued shares on a one-for-one basis. Exercise period Vesting date to expiry date. Expiry date 31 December 2011 or 31 December 2013 depending upon the tranche. Summary of performance targets for options EPS hurdle – % of tranche options vesting (applicable to 80% of each tranche) % of tranche tied to KPI hurdle Equal to prospectus forecast EPS % 5% or more than prospectus forecast EPS % Equal to 5% EPS growth % Equal to 10% EPS growth % Equal to 15% EPS growth % 60 – – – 100 – – – – 10 10 15 – 33 33 50 – 75 75 100 Equal to or more than 20% EPS growth % – 100 100 – Tranche 1 2 3 4 % 20 20 20 20 Not all options have a Tranche 1. Where performance falls between target EPS thresholds (e.g. more than 5% EPS but less than 10% EPS), then pro-rata vesting will apply. EPS is measured on an annual compounding basis to the relevant performance testing date using the Basic EPS of 13.0 cents per share detailed above as the base line number. Where performance falls between target EPS thresholds (e.g. more than 5% EPS but less than 10% EPS), then pro-rata vesting will apply. Retesting of the EPS hurdle for any unvested Tranche 1 options will not be permitted. Tranche 1 options that do not vest on the measurement of the EPS hurdle will be taken to have lapsed under the LTIP rules. Retesting of the EPS hurdle for any unvested Tranche 2, 3 and 4 options will occur at the testing date in respect of the next financial year-end date immediately following the relevant initial testing date, with the measurement period taken from the date of grant of the options to the relevant retesting date. Performance will be measured on a compounding basis. The options that do not vest on retesting will be taken to have lapsed under the LTIP rules. 24 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Directors’ Report continued Options granted by former shareholders of Flexirent Holdings Pty Limited to certain executives in 2007 year Eighth SRJ Pty Limited as Trustee of the Philadelphia Trust and Viewlove Pty Limited as Trustee of David Berkman Family Trust, both former shareholders of Flexirent Holdings Pty Limited, agreed at the time of the IPO to grant options over shares owned by them. The options are over 6,120,655 shares and 1,491,845 shares respectively and are in favour of John DeLano. These options are subject to the same terms and conditions, including achievement of performance hurdles and rights to exercise, as the options issued on 8 December 2006 to the Directors of the Company and Key Management Personnel. A share-based payment expense relating to the options granted by the former shareholders is included in the statement of profit and loss and also in the total Key Management Personnel remuneration note on page 20. Details of the performance rights This table sets out the details of the performance rights issued to J DeLano. Instrument Exercise price Each performance right represents an entitlement to one ordinary share. Nil. Vesting conditions Vesting will occur on the achievement of one of the following conditions: • • • EPS of the Company for a financial year ending on or before 30 June 2011 is at least 24.6 cents per share. The EPS target number may be adjusted as the Board reasonably determines. The actual EPS for a financial year will be that set out in the Company’s annual audited accounts for the relevant financial year; The Company’s market capitalisation before 30 June 2011 is at least $1.2 billion for a continuous period of six months based on the existing capital structure. The market capitalisation target will be adjusted for any new share issues (excluding any shares issued for the exercise of these performance rights); or A change of control of the Company occurs before 30 June 2011 under a transaction that implies a market capitalisation value of the Company greater than $1.2 billion based on the existing capital structure. The market capitalisation target will be adjusted for any new share issues (excluding any shares issued for the exercise of these performance rights). The Board will confirm in writing to the performance rights holders when any of the above conditions have been satisfied (‘’Confirmation Notice”). Why vesting conditions were chosen The vesting conditions were chosen as performance conditions as they reflect, at the date they were granted, the generation of significant shareholder value. Vesting date Date the Company gives a Confirmation Notice. If one of the vesting conditions is met, the performance rights will vest. Should the performance rights holders cease to be employed on or prior to the performance rights vesting, all of the performance rights will lapse immediately unless the Board makes a determination that those performance rights have vested. Any performance rights that do not vest following the measurements of performance against the hurdles described above will lapse on the expiry date if not earlier. Exercise period Vesting date to expiry date. Expiry date 31 December 2012. Disposal restriction • • • 6 months following vesting date for 870,000 performance rights 12 months following vesting date for 870,000 performance rights 18 months following vesting date for 434,820 performance rights 25 Details of the performance rights This table sets out the details of the performance rights issued to Key Management Personnel. Instrument Exercise price Vesting conditions EPS performance target Each performance right represents an entitlement to one ordinary share. Nil. Performance rights will vest on, and become exercisable on or after, the Vesting Date to the extent that certain performance conditions that are based on the financial performance of FlexiGroup and the achievement of pre-determined Key Performance Indicators (“KPI hurdle”) have been satisfied over the performance measurement period. The measure used to determine FlexiGroup’s financial performance is Earnings Per Share growth targets (“EPS hurdle”). Eighty percent (80%) of each tranche of performance rights will be subject to the EPS hurdle, while the remaining twenty percent (20%) will be subject to the KPI hurdle. The basic EPS (“Basic EPS”) for the purposes of the grant of performance rights under this invitation is 13.0 cents per share. The applicable EPS hurdle for each test period is measured on an annual compounding basis to the relevant performance test date, using the Basic EPS as the base line number. Performance testing (“testing date”) against the EPS hurdle will take place on the date of announcement of the relevant annual financial results of FlexiGroup. For some but not all tranches, retesting will occur at the retesting date in respect of the next financial year-end date immediately following the relevant initial testing date. Performance rights that do not vest on retesting will be taken to have lapsed. The applicable EPS hurdle for each test period is measured on an annual compounding basis to the relevant performance test date, using the basic EPS as the base line number. The Board has the discretion to vary at any time the EPS hurdle applicable to all or part of the performance rights. Why vesting conditions were chosen The vesting conditions were chosen as performance conditions as they reflect, at the date they were granted, the generation of significant shareholder value. KPI performance target The KPI hurdle may include any combination of operational, volume and product mix, cultural, financial and other measures as determined and modified by the Board from time to time. The KPI hurdle will be performance tested against these measures over each relevant financial year unless otherwise determined by the Board. The relevant KPI hurdle for each year will be determined by the Board by 30 September of the relevant financial year. In the case of FY2009, the relevant KPI hurdles were determined by the Board. The KPI hurdles will be performance tested against those measures over each relevant financial year unless otherwise determined by the Board. In determining whether the KPI performance hurdles have been satisfied, a report is prepared for the Remuneration Committee detailing each KPI performance hurdle and the performance of the executive against the hurdle. The Remuneration Committee approves that rating for all KPI performance hurdles. Vesting date Tranches 1, 2 and 3 – 1 September 2010 at 5.00pm (Sydney time) Exercise period Tranche 1 – From vesting date to expiry date Tranche 4 – 1 September 2011 at 5.00pm (Sydney time) Tranche 2 – From vesting date to expiry date Tranche 3 – From vesting date to expiry date Tranche 4 – From vesting date to expiry date Expiry date Tranches 1, 2 and 3 – 31 December 2012 at 5.00pm (Sydney time) Disposal restriction No disposal restriction imposed at the time of this grant. Tranche 4 – 31 December 2013 at 5.00pm (Sydney time) 26 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Directors’ Report continued Summary of performance targets for performance rights EPS hurdle – % of tranche options vesting (applicable to 80% of each tranche) % of tranche tied to KPI hurdle Size (percentage of initial grant) % 25 25 25 25 Vesting date 1 Sep 2010 1 Sep 2010 1 Sep 2010 1 Sep 2011 Equal to 5% EPS growth % Equal to 10% EPS growth % Equal to 15% EPS growth % 10 25 25 25 33 75 75 100 75 100 100 – Tranche 1 2 3 4 Equal to or more than 20% EPS growth % 100 – – – % 20 20 20 20 EPS is measured on an annual compounding basis to the relevant performance testing date using the Basic EPS of 13.0 cents per share detailed above as the base line number. Where performance falls between target EPS thresholds (e.g. more than 5% EPS but less than 10% EPS), then pro-rata vesting will apply. Retesting of the EPS hurdle for any unvested Tranche 1 performance rights will not be permitted. Tranche 1 performance rights that do not vest on the measurement of the EPS hurdle will be taken to have lapsed under the plan rules. Retesting of the EPS hurdle for any unvested Tranche 2, 3 and 4 performance rights will occur at the testing date in respect of the next financial year-end date immediately following the relevant initial testing date, with the measurement period taken from the grant date of the performance rights to the relevant retesting date. Performance will be measured on a compounding basis. The performance rights that do not vest on retesting will be taken to have to have lapsed under the plan rules. Details of retention rights This table sets out the details of the retention rights (a form of performance rights) issued to N Roberts, G McLennan, P Laughton and D Klotz. Instrument Exercise price Vesting conditions Why vesting conditions were chosen Each retention right represents an entitlement to one ordinary share. Nil. Subject to the executive remaining an employee of FlexiGroup as at the vesting date, retention rights will vest on, and become exercisable on or after, the vesting date. There are no performance hurdles applicable to the retention rights. The vesting conditions are designed to ensure retention of key executives. Vesting date 1 September 2010 Exercise period 1 September 2010–31 December 2012 Expiry date 31 December 2012 Disposal restriction No disposal restriction imposed at the time of this grant. 27 Details of the deferred shares This table sets out the details of the deferred shares issued to J DeLano. Instrument Exercise price Each deferred share represents an entitlement to one ordinary share. Nil. Tranche components 50% of each tranche of deferred shares relates to vesting condition 1 Vesting conditions 50% of each tranche of deferred shares relates to vesting condition 2 Vesting condition 1 The performance hurdle set by the Board in relation to vesting condition 1 for each tranche is based on total shareholder return (“TSR”) of the Company for the relevant performance period. If the TSR of the Company equals: • • 10% or higher for the performance period between 1 July 2008 to 1 July 2009 (“performance period 1”); or 15% or higher for the performance periods between 1 July 2009 to 30 June 2010 (“performance period 2”) and 1 July 2010 to 30 June 2011 (“performance period 3”), all of the deferred shares for the relevant tranche that are subject to vesting condition 1 will vest. The Board believes that a suitable TSR-based performance hurdle is 15%. However, in relation to performance period 1, the Board believes a performance hurdle of 10% TSR is more appropriate due to the current market volatility and the integration required following the acquisition of the Certegy business, which is expected to be dilutive initially. The TSR for performance periods 2 and 3 is determined by calculating the amount by which the sum of the 30 day volume weighted average price (“VWAP”) for FlexiGroup’s ordinary shares in the period up to and including 30 June (that is the end) of the relevant performance period and the dividends paid on an ordinary share in FlexiGroup during the performance period exceeds the 30 day VWAP for FlexiGroup’s ordinary shares in the period up to and including 1 July (that is the beginning) of the performance period, expressed as a percentage (note: there was a minor typographical error in the 2008 Annual General Meeting notice of meeting between the TSR start date and end date). The TSR for performance period 1 will be the same as above except that the VWAP used for the beginning of the performance period will be the 30 day VWAP up to and including the date of the 2008 Annual General Meeting, being 27 November 2008. Vesting condition 2 The performance hurdle set by the Board in relation to vesting condition 2 for each tranche is based on TSR growth of the Company measured against other companies in the S&P/ASX 300 Index (not including resources companies) TSR growth for the relevant performance period. TSR for the Company for a performance period will be measured in the same way as for vesting condition 1. The same 30 day VWAP calculations will be used to determine the TSR for a performance period of the other companies in the S&P/ASX 300 Index (not including resources companies). The performance hurdle for vesting condition 2 will be considered satisfied in accordance with the following percentages of the tranches earned: Nil – if the Company’s TSR ranked in the 4th quartile (i.e. 76th to 100th ranking) of companies in the S&P/ASX 300 Index (excluding resources companies). 25% – if the Company’s TSR equals performance of the 75th ranking company in the S&P/ASX 300 Index (excluding resources companies). Pro rata between 25% and 50% – if the Company’s TSR ranked in the 3rd quartile (i.e. 51st to 75th ranking) of companies in the S&P/ASX 300 Index (excluding resources companies). Pro rata between 50% and 100% – if the Company’s TSR ranked in the 2nd quartile (i.e. 26th to 50th ranking) of companies in the S&P/ASX 300 Index (excluding resources companies). 100% – if the Company’s TSR ranked in the 1st quartile (i.e. 1st to 25th ranking) of companies in the S&P/ASX 300 Index (excluding resources companies). 28 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Directors’ Report continued Why vesting conditions were chosen The vesting conditions were chosen as performance conditions as they reflect, at the date they were granted, the generation of significant shareholder value. Retention date 1 September 2011 at 5.00pm (Sydney time) Distributions/Dividends Participants are entitled to receive distributions/dividends made in respect of the deferred shares. Performance period Tranche 1 – Performance period 1 (being 1 July 2008 to 30 June 2009) Tranche 2 – Performance period 2 (being 1 July 2009 to 30 June 2010) Tranche 3 – Performance period 3 (being 1 July 2010 to 30 June 2011) Disposal restriction Deferred shares that vest in accordance with the applicable vesting conditions will be subject to a restriction on disposal until the retention date of 1 September 2011. Details of the deferred shares This table sets out the details of the deferred shares issued to G McLennan, N Roberts, P Laughton and D Klotz. Instrument Exercise price Each deferred share represents an entitlement to one ordinary share. Nil. Tranche components 33.33% of each tranche of deferred shares relates to vesting condition 1 Vesting conditions 33.33% of each tranche of deferred shares relates to vesting condition 2 33.33% of each tranche of deferred shares relates to vesting condition 3 Vesting condition 1 The performance hurdle set by the Board in relation to vesting condition 1 for each tranche is based on the TSR of the Company for the relevant performance period. If the TSR of the Company equals: • • 10% or higher for the performance period between 1 July 2008 to 1 July 2009 (“performance period 1”); or 15% or higher for the performance periods between 1 July 2009 to 30 June 2010 (“performance period 2”) and 1 July 2010 to 30 June 2011 (“performance period 3”), all of the deferred shares for the relevant tranche that are subject to vesting condition 1 will vest. The Board believes that a suitable TSR-based performance hurdle is 15%. However, in relation to performance period 1, the Board believes a performance hurdle of 10% TSR is more appropriate due to the current market volatility and the integration required following the acquisition of the Certegy business, which is expected to be dilutive initially. The TSR for performance periods 2 and 3 is determined by calculating the amount by which the sum of the 30 day volume weighted average price (“VWAP”) for FlexiGroup’s ordinary shares in the period up to and including 30 June (that is the end) of the relevant performance period and the dividends paid on an ordinary share in FlexiGroup during the performance period exceeds the 30 day VWAP for FlexiGroup’s ordinary shares in the period up to and including 1 July (that is the beginning) of the performance period, expressed as a percentage. The TSR for performance period 1 will be the same as above except that the VWAP used for the beginning of the performance period will be the 30 day VWAP up to and including the date of the 2008 Annual General Meeting, being 27 November 2008. 29 Vesting conditions continued Vesting condition 2 The performance hurdle set by the Board in relation to vesting condition 2 for each tranche is based on TSR growth of the Company measured against other companies in the S&P/ASX 300 Index (not including resources companies) TSR growth for the relevant performance period. TSR for the Company for a performance period will be measured in the same way as for vesting condition 1. The same 30 day VWAP calculations will be used to determine the TSR for a performance period of the other companies in the S&P/ASX 300 Index (not including resources companies). The performance hurdle for vesting condition 2 will be considered satisfied in accordance with the following percentages of the tranches earned: Nil – if the Company’s TSR ranked in the 4th quartile (i.e. 76th to 100th ranking) of companies in the S&P/ASX 300 Index (excluding resources companies). 25% – if the Company’s TSR equals performance of the 75th ranking company in the S&P/ASX 300 Index (excluding resources companies). Pro rata between 25% and 50% – if the Company’s TSR ranked in the 3rd quartile (i.e. 51st to 75th ranking) of companies in the S&P/ASX 300 Index (excluding resources companies). Pro rata between 50% and 100% – if the Company’s TSR ranked in the 2nd quartile (i.e. 26th to 50th ranking) of companies in the S&P/ASX 300 Index (excluding resources companies). 100% – if the Company’s TSR ranked in the 1st quartile (i.e. 1st to 25th ranking) of companies in the S&P/ASX 300 Index (excluding resources companies). Vesting condition 3 The performance hurdle in relation to vesting condition 3 is based on personal key performance indicators (“KPIs”) applicable set by the Board with respect to each performance period. A KPI hurdle may include any combination of operational, volume/product mix, cultural, financial and other measures as determined by the Board and notified from time to time. The KPI hurdle will be performance tested over each relevant performance period unless otherwise determined by the Board. Why vesting conditions were chosen The vesting conditions were chosen as performance conditions as they reflect, at the date they were granted, the generation of significant shareholder value. Retention date 1 September 2011 at 5.00pm (Sydney time). Distributions/Dividends Participants are entitled to receive distributions/dividends made in respect of the deferred shares. Performance period Tranche 1 – Performance period 1 (being 1 July 2008 to 30 June 2009) Tranche 2 – Performance period 2 (being 1 July 2009 to 30 June 2010) Tranche 3 – Performance period 3 (being 1 July 2010 to 30 June 2011) Disposal restriction Deferred shares that vest in accordance with the applicable vesting conditions will be subject to a restriction on disposal until the retention date of 1 September 2011. 30 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Directors’ Report continued The terms and conditions of each grant of options, performance rights and deferred shares affecting remuneration in the previous, this or future reporting periods are as follows: Grant date 8 Dec 2006 19 Apr 2007 29 Nov 2007 3 Apr 2008 3 Apr 2008 1 Oct 2008 1 Oct 2008 27 Nov 2008 31 Mar 2009 Tranche number Date vested and exercisable Expiry date Value per option, performance right, Exercise deferred share at grant date cents pricea $ 1 2 3 4 1 2 3 1 1 2 3 4 1 1 2 3 1 1 2 3 1 2 3 1 Sep 2010 31 Dec 2011 1 Sep 2010 31 Dec 2011 1 Sep 2010 31 Dec 2011 1 Jun 2011 31 Dec 2012 1 Sep 2008 31 Dec 2011 1 Sep 2009 31 Dec 2011 1 Sep 2010 31 Dec 2012 b 31 Dec 2012 1 Sep 2010 31 Dec 2012 1 Sep 2010 31 Dec 2012 1 Sep 2010 31 Dec 2012 1 Sep 2011 31 Dec 2013 1 Sep 2010 31 Dec 2012 1 Sep 2010 31 Dec 2012 1 Sep 2010 31 Dec 2012 1 Sep 2011 31 Dec 2013 1 Sep 2010 31 Dec 2012 1 Sept 2011 23 Dec 2018 1 Sept 2011 23 Dec 2018 1 Sept 2011 23 Dec 2018 1 Sep 2011 31 Mar 2019 1 Sep 2011 31 Mar 2019 1 Sep 2011 31 Mar 2019 2.00 2.00 2.00 2.00 2.93 2.93 2.93 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 40 40 40 41 51 53 58 2.5 34 34 34 34 34 39 39 36 39 16 19 19 33 33 33 a b The exercise price must be paid by the option holder to exercise the options when the option vests. Vesting date is the date the Company gives a “Confirmation Notice”. The performance right is exercisable on the vesting date. 31 The Directors of the Company and Key Management Personnel of the consolidated entity were granted the following options, performance rights and deferred shares during the reporting period. Name Directors of FlexiGroup Limited M Jackson J DeLano A Abercrombie R Dhawan R J Skippen Executives of FlexiGroup G McLennan N Roberts D Klotz P Laughton P McMahon Number of options, performance rights and deferred shares granted during the year Number of options, performance rights and deferred shares vested during the year 2009 2008 2009 2008 (All issues are deferred shares, (All issues are retention rights and performance and retention rights) performance rights) – – 7,500,000 2,174,820 – – – – – – 1,400,000 N/A 400,000 1,000,000 – – – – – – – – – – – – – N/A 500,000 1,000,000 369,600 – 400,000 1,000,000 – – – – – – N/A – Not a Key Management Personnel in the respective year. The assessed fair value at grant date of options and performance rights granted to the individuals is allocated equally over the period from grant date to vesting date, and the amount is included in the remuneration table on page 19. Fair values at grant date are independently determined using a binomial tree option pricing methodology that takes into account the exercise price, the term of the options and performance rights, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the options and performance rights. The model inputs for performance rights and deferred shares granted during the year ended 30 June 2009 included: (a) Exercise price: various per performance rights and deferred shares granted (b) Grant date: various per performance rights and deferred shares granted (c) Expiry date: various per performance rights and deferred shares granted (d) Share price at grant date: various per performance rights and deferred shares granted (e) Expected price volatility of the Company’s shares: 59%–64% (2008: 50%) (f) Expected dividend yield: 6.4%–14.6% (2008: 13%) (g) Risk-free interest rate: various ranging from 2.83%–5.09% (2008: 6.09% to 6.15%) Shares provided on exercise of remuneration options No ordinary shares in the Company were issued as a result of the exercise of any remuneration options. 32 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Directors’ Report continued E. Additional information Details of remuneration: cash bonuses and options, performance rights and deferred shares For each cash bonus and grant of options, performance rights and deferred shares, the percentage of the available bonus or grant that was paid, or that vested, in the financial year, and the percentage that was forfeited because the person did not meet the service and performance criteria is set out below. The options, performance rights and deferred shares vest in accordance with the vesting schedules detailed on page 30. No options and/or performance rights and/or deferred shares will vest if the conditions are not satisfied, hence the minimum value of the rights yet to vest is nil. The maximum value of the rights yet to vest has been determined as the amount of the fair value at grant date of the rights that are yet to be expensed. 2009 Cash bonus Options, performance rights and deferred shares Name Paid % Forfeited % Year granted Vested % Forfeited % performance Minimum total value of grant yet to vest $ rights and deferred shares may vest Maximum total value of grant yet to vest $ Financial years in which options, Executive Directors of FlexiGroup Limited J DeLano (Chief Executive Officer) 90 10 Executives of FlexiGroup G McLennan N Roberts 90 75 10 25 D Klotz 90 10 P Laughton 95 5 2009 2008 2007 2009 2009 2009 2008 2007 2009 2008 2008 2009 2008 2007 – – – – – – – – – – 15 – – – – – 30/6/2012 30/6/2010 18 30/6/2011 – – 8 30/6/2011 30/6/2012 30/6/2012 18 30/6/2011 – – – 7 – 8 30/6/2011 30/6/2012 30/6/2011 30/6/2010 30/6/2012 30/6/2011 18 30/6/2011 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 1,350,000 54,371 1,797,681 382,860 132,000 72,000 313,344 546,826 90,000 313,344 666,876 72,000 313,344 181,834 33 Share-based compensation: options, performance rights and deferred shares Further details relating to options, performance rights and deferred shares are set out below. 2009 A B C D Remuneration consisting of options, performance rights and deferred shares % Value at grant date $ Value at exercise date $ Value at lapse date $ Executive Directors of FlexiGroup Limited J DeLano (Chief Executive Officer) 28.3 1,350,000 Executives of FlexiGroup G McLennan N Roberts D Klotz P Laughton 11.6 27.1 31.9 21.3 514,860 72,000 90,000 72,000 – – – – – – – – – – A = The percentage of the value of remuneration consisting of options, performance rights and deferred shares, based on the value of options, performance rights and deferred shares expensed during the current year. B = The value at grant date calculated in accordance with AASB 2 Share-based Payments of options, performance rights and deferred shares granted during the year as part of remuneration. C = The value at exercise date of options, performance rights and deferred shares that were granted as part of remuneration and were exercised during the year, being the intrinsic value of the options, performance rights and deferred shares at that date. D = The value at lapse date of options, performance rights and deferred shares that were granted as part of remuneration and that lapsed during the year, but assuming the condition was satisfied. 34 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Directors’ Report continued Shares under options, performance rights and deferred shares As at the date of this report, there were 17,721,829 unissued ordinary shares of FlexiGroup Limited subject to options or performance rights. Of those unissued ordinary shares, 9,227,693 are subject to option with expiry dates between 31 December 2011 and 31 December 2012 and exercise prices between $1.59 and $2.93, with a weighted average exercise price of $2.08. The remaining 8,494,136 unissued ordinary shares are the subject of performance rights with expiry dates between 31 December 2012 and 31 December 2014. Options granted over 7,612,500 shares by former shareholders of Flexirent Holdings Pty Limited in favour of certain executives of the Company are not included in this calculation as the shares have already been issued. At the date of this report, there are also 10,947,500 deferred shares which are held by the FlexiGroup Tax Deferred Employee Share Plan. No option holder has any right under the option to participate in any other share issues of the Company or any other entity. Directors’ indemnification During the year ended 30 June 2009, the Company paid insurance premiums in respect of a Directors’ and Officers’ Liability insurance contract. Disclosure of the total amount of the premium and the nature of the liabilities in respect of such insurance is prohibited by the policy. Indemnity of auditors The Company has indemnified its auditors against any liability (including legal costs) that the auditors incur in connection with any claim by a third party arising from the Company’s breach of its agreement with its auditors. Proceedings on behalf of the Company No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part or those proceedings. The Company was not a party to any such proceedings during the year. No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. Non-audit services The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Company and/or the Group are important. Details of the amounts paid or payable to the auditor (PricewaterhouseCoopers) for audit and non-audit services provided during the year are set out in note 35 of the financial report. The Board of Directors has considered the position and, in accordance with advice received from the Audit & Risk Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provisions of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirement of the Corporations Act 2001 for the following reasons: • • all non-audit services have been reviewed by the Audit & Risk Committee to ensure they do not impact the impartiality and objectivity of the auditor none of the services undermine the general principle relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants Declaration of interests Other than as disclosed in the financial report, no Director of the Company has received or become entitled to receive a benefit other than remuneration by reason of a contract made by the Company or a related corporation with a Director or with a firm of which he or she is a member, or with a Company in which he or she has a substantial financial interest except that Flexirent Capital Pty Limited has rented premises in Melbourne and Sydney owned by a company associated with Mr A Abercrombie. The lease is on standard market terms. Rounding of amounts The Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the Directors’ Report. Amounts in the Directors’ Report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. 35 Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 36 and forms part of this report. Auditor PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. This Report is made in accordance with a resolution of Directors. Margaret Jackson Chairman Sydney 19 August 2009 36 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Auditor’s Independence Declaration Auditor’s Independence Declaration PricewaterhouseCoopers ABN 52 780 433 757 Darling Park Tower 2 201 Sussex Street GPO BOX 2650 SYDNEY NSW 1171 DX 77 Sydney Australia Telephone +61 2 8266 0000 Facsimile +61 2 8266 9999 As lead auditor for the audit of FlexiGroup Limited and its controlled entities for the year ended 30 June 2009, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of FlexiGroup Limited and the entities it controlled during the period. Victor Clarke Partner PricewaterhouseCoopers Sydney 19 August 2009 Liability limited by a scheme approved under Professional Standards Legislation 37 Corporate Governance Composition of the Board Independent professional advice At the date of this statement, the Board comprises four Non-Executive Directors, three of whom are independent and one Executive Director (Chief Executive Officer). The names of the Directors, including details of their qualifications and experience, are set out in the “Information on Directors” section of the 2009 FlexiGroup Limited Annual Report. Role of the Board The role of the Board is to provide overall strategic guidance for the Company and effective oversight of management. The primary responsibilities of the Board include: • • • • • • overseeing the development of the Company’s corporate strategy including reviewing and approving strategic plans and performance objectives of the Company the appointment of the Chief Executive Officer and senior executives, monitoring senior management’s performance and approving senior management remuneration policies and practices effective communication with shareholders including reporting to shareholders and ensuring that all regulatory requirements are met establishing and monitoring policies governing the Company’s relationship with other stakeholders and the broader community, including establishing and maintaining environmental, employment, occupation, health and safety policies actively promoting ethical and responsible decision-making reviewing and approving annual and half-yearly financial reports, monitoring financial results on an ongoing basis, overseeing the Company’s accounting and financial management systems, approving and monitoring major capital expenditure, capital management, major acquisition, divestitures and restructures, and determining dividend policy • establishing and overseeing the Company’s controls and systems for identifying, assessing, monitoring and reviewing material risks Following consultation with the Chairman, Directors may seek independent professional advice at the Company’s expense. Generally, this advice will be available to all Directors. Performance assessment The Board undertakes an annual self assessment of its collective performance, the performance of the Chairman and of its Committees. The Chairman meets privately with each Director to discuss individual and collective performance of Directors. Re-election of Directors At each Annual General Meeting of the Company there must be an election of Directors. The Directors who must retire from office (but are eligible to stand for re-election) at the general meeting are as follows: (a) each Director who has held office without re-election i. beyond the third Annual General Meeting following the Director’s appointment or last election; or ii. for at least three years, whichever is the longer period (b) each Director who was appointed by the Directors under article 10.7 of the constitution (c) if none of (a) or (b) is applicable, the Director who has served in office longest without re-election. If there are two or more such Directors who have been in office an equal length of time, then in default of agreement, the Director to retire will be determined by lot Conflicts of interest Directors are required to keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with those of the Company. Where the Board believes that a significant conflict may exist, the Director concerned does not receive the relevant Board papers and is not present at the meeting while the item is considered. Additionally, Directors are required to advise the Board of any Board or executive appointments to other companies and any related party transactions including financial transactions with the Group. 38 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Corporate Governance continued Financial reporting The Chief Executive Officer and Chief Financial Officer have certified to the Board that the Company’s financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the Company and are in accordance with relevant accounting standards. The Board receives monthly reports from management on the financial and operational performance of the Group. Board committees The Board may delegate responsibility to committees to consider certain issues in further detail and then report back to and advise the Board. Committees established by the Board have adopted charters setting out the authority, responsibilities, membership and operation of the committee. There are currently three committees: Audit & Risk Committee, Nomination Committee and Remuneration Committee. The Board charter is available on the FlexiGroup website. Audit & Risk Committee The role of the Committee is to assist the Board in carrying out its accounting, auditing and financial reporting responsibilities, including oversight of: (a) the integrity of the Company’s external financial reporting and financial statements (b) the appointment, remuneration, independence and competence of the Company’s external auditors (c) the performance of the external audit function and review of its audits (d) the effectiveness the Company’s system of risk management and internal controls and (e) the Company’s systems and procedures for compliance with applicable legal and regulatory requirements The Audit & Risk Committee provides advice to the Board and reports on the status and management of the risks to the Company. The purpose of the Committee’s risk management process is to ensure that risks are identified, assessed and appropriately managed. The Board has adopted a policy regarding the services that the Company may obtain from its external auditor. It is the policy of the Company that its: • • external auditor firm must be independent of the Company, the Directors and senior executives. To ensure this, the Group will require a formal confirmation for independence from its external auditor on an annual basis, and external auditor may not provide services to the Company that are perceived to be materially in conflict with the role of the external auditor. Services which involve the external auditor acting in a managerial or decision-making capacity, or processing or originating transactions, are not appropriate. However, the external auditor may be permitted to provide additional services, which are not perceived to be materially in conflict with the role of the external auditor, if the Board or Audit & Risk Committee has approved those additional services or they fall within the terms of any approved policy. Such additional services may include financial audits, audits or reviews undertaken for regulatory purposes, completion audits, tax compliance, advice on accounting standards, and due diligence on certain acquisition or sale transactions. The Committee must comprise at least three Directors, all of whom must be Non-Executive Directors and a majority of whom must be independent. The Chairman of the Committee must be an independent Non-Executive Director who is not the Chairman of the Board. The Committee will meet as often as is required to undertake its role effectively. The Chief Executive Officer and Chief Financial Officer are expected to attend each scheduled meeting of the Committee and a standing invitation will be issued to the external auditors. The Committee Chairperson may also invite Directors who are not members of the Committee, other senior managers and external advisors to attend meetings of the committee. The Committee may request management and/or others to provide such input and advice as is required. The Committee will regularly report to the Board about committee activities, issues and related recommendations. The Audit & Risk Committee charter is available on the FlexiGroup website. The Committee comprises R John Skippen (Chair), Margaret Jackson and Rajeev Dhawan. 39 Remuneration Committee Code of Conduct The role of the Remuneration Committee is to review and make recommendations to the Board on remuneration packages and polices related to the Directors, the Chief Executive Officer and senior executives and to ensure that the remuneration policies and practices are consistent with the Company’s strategic goals and human resource objectives and comply with relevant legal requirements. The Committee will consist of at least three members. The Company will endeavour to ensure that a majority of the members are independent, Non-Executive Directors. The Committee will meet as often as is required to perform its functions. The Remuneration Committee charter is available on the FlexiGroup website. The Committee comprises Rajeev Dhawan (Chair), Margaret Jackson, R John Skippen and Andrew Abercrombie. Nomination Committee The Committee assists and advises the Board on (a) Director selection and appointment practices (b) Director performance evaluation processes and criteria (c) Board composition (d) Succession planning for the Board and senior management The Committee also ensures that the Board is of a size and composition conducive to making decisions expediently, with the benefit of a variety of perspectives and skills, and in the best interests of the Company as a whole. The Committee will consist of at least three members. The Company will endeavour to ensure that a majority of the Committee members are independent, Non-Executive Directors. The Nomination Committee charter is available on the FlexiGroup website. The Committee comprises Andrew Abercrombie (Chair), Margaret Jackson, R John Skippen and Rajeev Dhawan. The Company has adopted a Code of Conduct. The Code of Conduct (“Code”) sets out the ethical standards and rules of the Company and provides a framework for how the Company will operate its business in a manner that will protect its stakeholders. The Code applies to all Directors, officers, employees, contractors, consultants and associates of the Company. The Code specifically covers conflicts of interest, corporate opportunities and other benefits, confidentiality, privacy, fair dealing, discrimination, protection of and use of the Company’s assets and property, compliance with laws and regulations, approach to disclosure and financial reporting, insider trading and whistleblower protection. The Code of Conduct is available on the FlexiGroup website. Communications with Shareholders The Company communicates to shareholders through the Company’s annual reports, Annual General Meeting, half-year and full-year results and Company website. All announcements are made available on the website. During periods of particular sensitivity, the Company’s policy is to avoid any discussion with shareholders, media, analysts or other market operators for 30 days prior to the close of the half and full-year accounting periods to the time of the half and full-year profit announcements. This policy is subordinate to the ASX requirements of continuous disclosure. Continuous disclosure The Company Secretary has been nominated as the person responsible for communication with the Australian Securities Exchange (“ASX”). This role includes responsibility for ensuring compliance with the continuous disclosure requirements in the ASX Listing Rules and overseeing and co-ordinating information disclosure to the ASX, analysts, brokers, shareholders, the media and the public. When analysts are briefed following half-year and full-year results announcements, the material used in the presentations is released to the ASX prior to the commencement of the briefing. The Company ensures that if any price-sensitive information is inadvertently disclosed, this information is also immediately released to the market. The Company is committed to ensuring that all stakeholders and the market are provided with relevant and accurate information regarding its activities in a timely manner. 40 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Corporate Governance continued External auditors PricewaterhouseCoopers was appointed as the external auditor in 2005. It is PricewaterhouseCoopers’ policy to rotate audit engagement partners on listed companies at least every five years. The performance of the external auditor is reviewed annually. An analysis of fees paid to the external auditor, including a breakdown of fees for the non-audit services, is provided in the notes to the full financial report. It is the policy of the external auditor to provide an annual declaration of independence to the Audit & Risk Committee. The external auditors are required to attend the Annual General Meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the audit report. Indemnification The constitution of the Company provides an indemnity (to the maximum extent permitted by law) in favour of current and past Directors, Company Secretaries, and all other past and present executive officers when acting in their capacities in respect of: (a) all liabilities to another person (other than the Company or related entities) if the relevant officers have acted in good faith, and (b) the costs and expenses of successfully defending legal proceedings Under Deeds of Access and Indemnity, the Company has agreed to indemnify each current Director and each Company Secretary for all liabilities that may arise as a result of the Directors or Company Secretary acting in that capacity to the full extent permitted by law. The deed stipulates that the Company will meet the full amount of any such liabilities including legal costs. Directors and senior management dealings in Company securities The Company’s constitution permits Directors to acquire securities in the Company. However, the Board has adopted a Share Trading Policy that prohibits Directors, senior management and staff from dealing in the Company’s securities at any time whilst in possession of price-sensitive information which is not generally available to the marketplace. The following approvals must also be obtained before a Director or designated person can deal in the Company’s securities: Person Chairman Approval required from Chairman of the Audit & Risk Committee and Chief Executive Officer Managing Director or Chief Executive Officer Chairman Directors (except Chairman) Chairman Chief Financial Officer or Company Secretary Direct reports to Chief Executive Officer and other designated persons nominated by the Board Chief Executive Officer Chief Financial Officer The share dealing policy also extends to dealing in a financial product which operates to limit the economic risk of a holding in the Company’s securities. Dealing in those types of products is not permitted. The granting of approval to deal in the Company’s securities is co-ordinated by the Company Secretary who is also responsible for reporting to the Board all transactions by Directors, senior managers and designated persons. In accordance with the provisions of the Corporations Act 2001 and the ASX Listing Rules, the Company advises the ASX of any transaction conducted by Directors in securities in the Company. The Share Trading Policy is made available to employees through the Company’s internal compliance and governance intranet sites and is also included in the offer of employment to new employees. The Share Trading Policy is also on the FlexiGroup website. 41 Annual Financial Report 30 June 2009 Contents Financial Report Income Statements Balance Sheets Statements of Changes in Equity Cash Flow Statements Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report to the members Page 41 42 43 44 45 46 88 89 This financial report covers both FlexiGroup Limited as an individual entity and the consolidated entity consisting of FlexiGroup Limited and its subsidiaries. The financial report is presented in Australian currency. FlexiGroup Limited is a Company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 8, The Forum 201 Pacific Highway St Leonards NSW 2065 A description of the nature of the entity’s operations and its principal activities is included in the review of operations and activities in the Directors’ Report on page 14, both of which are not part of this financial report. The financial report was authorised for issue by the Directors on 19 August 2009. The Company has the power to amend and reissue the financial report. Through the use of the internet, we have ensured that our corporate reporting is timely, complete, and available globally at a minimum cost to the Company. All press releases, financial reports and other information are available at Investor Information on our website: www.flexigroup.com.au. 42 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Income Statements For the year ended 30 June 2009 Consolidated Parent entity Notes 2009 $’000 2008 $’000 2009 $’000 2008 $’000 Revenue from continuing operations 4 184,494 166,780 14,020 23,924 Borrowing costs Employee benefits expense (47,936) (44,844) (36,344) (33,837) Impairment losses on loans and receivables 5 (27,155) (21,910) – – – – – – Reversal of impairment/(Impairment charge) relating to investment in subsidiary Administration expenses Depreciation and amortisation expenses Communications and MIS expenses 17 5 Marketing and travel expenses Profit before income tax Income tax expense Profit for the year – – 50,000 (294,198) (13,756) (4,940) (3,537) (3,616) 47,210 (9,290) (3,164) (2,379) (4,082) – – – – – – – – 47,274 64,020 (270,274) 6 (14,408) (15,018) – – 26(b) 32,802 32,256 64,020 (270,274) Cents Cents Earnings per share for profit from continuing operations attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share 37 37 14.4 14.2 14.8 14.8 The above income statements should be read in conjunction with the accompanying notes. Balance Sheets As at 30 June 2009 Assets Current assets Cash and cash equivalents Receivables Customer loans Inventories Total current assets Non‑current assets Receivables Customer loans Plant and equipment Deferred tax assets Goodwill Other intangible assets Other financial assets Total non‑current assets Total assets Liabilities Current liabilities Payables Borrowings Current tax liability Provisions Total current liabilities Non‑current liabilities Borrowings Deferred tax liabilities Provisions Total non‑current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained profits Total equity 43 Consolidated Parent entity Notes 2009 $’000 2008 $’000 2009 $’000 2008 $’000 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 52,583 59,426 – – 219,946 228,512 11,201 12,551 97,036 5,019 10,324 2,891 – – – – 374,584 301,153 11,201 12,551 184,559 219,408 59,406 4,192 7,356 79,876 14,453 – 47,453 3,880 6,183 50,159 8,053 – – – – – – 1,014 1,521 – – – – – 188,045 349,842 335,136 189,059 724,426 636,289 200,260 135,000 136,521 149,072 31,487 25,512 276,984 209,788 4,376 1,009 8,194 667 – – – – 3,846 6,694 – – 313,856 244,161 3,846 6,694 265,499 268,521 25,470 24,630 522 332 291,491 293,483 – – – – – – – – 605,347 537,644 3,846 6,694 119,079 98,645 196,414 142,378 25 35,262 34,272 444,207 440,172 26(a) 26(b) (2,963) (3,624) 1,303 1,303 86,780 67,997 (249,096) (299,097) 119,079 98,645 196,414 142,378 The above balance sheets should be read in conjunction with the accompanying notes. 44 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Statements of Changes in Equity For the year ended 30 June 2009 Consolidated Parent entity Notes 2009 $’000 2008 $’000 2009 $’000 2008 $’000 Total equity at the beginning of the financial year 98,645 83,873 142,378 431,724 Exchange differences on translation of foreign operation Net income recognised directly in equity 26(a) Profit/(loss) for the year Total recognised income and expense for the year 269 269 32,802 33,071 (567) (567) 32,256 31,689 – – – – 64,020 64,020 (270,274) (270,274) Transactions with equity holders in their capacity as equity holders: Contributions of equity, net of transaction costs Dividends provided for or paid 25 27 990 4,850 4,035 4,850 (14,019) (23,922) (14,019) (23,922) Movement in share-based payments reserve 26(a) 392 2,155 – – Total equity at the end of the financial year 119,079 98,645 196,414 142,378 (12,637) (16,917) (9,984) (19,072) The above statements of changes in equity should be read in conjunction with the accompanying notes. 45 Cash Flow Statements For the year ended 30 June 2009 Consolidated Parent entity Notes 2009 $’000 2008 $’000 2009 $’000 2008 $’000 Other portfolio income and rental asset disposal proceeds 72,569 Cash flows from operating activities Lease rentals received Customer loan repayments received Bank interest received Payment to suppliers and employees Customer loans advanced Borrowing costs Net increase in borrowings Loss reserve payments Dividend received Taxation paid Net cash inflow provided from operating activities Cash flows from investing activities Payments for purchase of software and plant and equipment Proceeds from disposals of plant and equipment Loans to related parties Purchase of shares held in the FlexiGroup Tax Deferred Employee Share Plan Payments for purchase of Certegy business Net cash (outflow) from investing activities Cash flows from financing activities Dividends paid Share capital raised 401,510 396,546 80,708 4,726 19,570 5,525 61,144 (338,170) (352,833) (178,608) (41,246) (47,936) (44,844) 55,572 18,550 (6,398) (17,804) – – – – – – – – – – – – – – – – – – – – 14,020 23,924 (12,318) (15,847) – (978) 30 31,655 28,761 14,020 22,946 (6,349) (6,350) – – – (18,389) (24,738) – – – – – (3,045) – – – (3,874) 45 – – – (6,305) (3,045) (3,874) (14,019) (19,072) (14,019) (19,072) – – 3,044 – Net cash (outflow) from financing activities (14,019) (19,072) (10,975) (19,072) Net increase/(decrease) in cash and cash equivalents (7,102) 3,384 Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of year Financing arrangements 7 22 59,426 56,677 259 (635) 52,583 59,426 – – – – – – – – The above cash flow statements should be read in conjunction with the accompanying notes. 46 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements Contents 1 Summary of significant accounting policies 2 Critical accounting estimates 3 Segment information 4 Revenue 5 Expenses 6 Income tax expense 7 Cash and cash equivalents 8 Current assets – Receivables 9 Current assets – Customer loans 10 Current assets – Inventories 11 Non-current assets – Receivables 12 Non-current assets – Customer loans 13 Non-current assets – Plant and equipment 14 Non-current assets – Deferred tax assets 15 Non-current assets – Goodwill 16 Non-current assets – Intangible assets 17 Non-current assets – Other financial assets 18 Current liabilities – Payables 19 Current liabilities – Borrowings 20 Current liabilities – Current tax liabilities 21 Current liabilities – Provisions 22 Non-current liabilities – Borrowings 23 Non-current liabilities – Deferred tax liabilities 24 Non-current liabilities – Provisions 25 Contributed equity 26 Reserves and retained profits 27 Dividends 28 Key Management Personnel disclosures 29 Capital and leasing commitments 30 Reconciliation of profit after income tax to net cash inflow from operating activities 31 Events occurring after balance date 32 Subsidiaries 33 Business combinations 34 Related party transactions 35 Remuneration of auditors 36 Contingencies 37 Earnings per share 38 Share-based payments 39 Financial risk management 40 Deed of Cross Guarantee Page 47 56 56 57 57 58 59 59 59 60 60 60 61 62 62 63 63 64 64 64 64 65 66 66 67 68 69 70 72 73 73 74 74 75 76 76 77 77 81 86 47 1. Summary of significant accounting policies The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial report includes separate financial statements for FlexiGroup Limited as an individual entity and the consolidated entity consisting of FlexiGroup Limited and its subsidiaries. The following is a summary of the material accounting policies adopted by the consolidated entity in the preparation of the financial report. The accounting policies have been consistently applied, unless otherwise stated. a. Basis of preparation This general purpose financial report has been prepared in accordance with Australian equivalents to International Financial Reporting Standards (AIFRS), other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group (UIG) interpretations and the Corporations Act 2001. Compliance with IFRS The financial report of FlexiGroup Limited also complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and liabilities (including derivative instruments) at fair value through profit or loss, certain classes of property, plant and equipment and investment property. Critical accounting estimates The preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement of complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 2. b. Principles of consolidation Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of FlexiGroup Limited (“Company” or “parent entity”) as at 30 June 2009 and the results of all the subsidiaries for the year then ended. FlexiGroup Limited and its subsidiaries together are referred to in this financial report as the Group or the consolidated entity. Subsidiaries are all those entities (including special purpose entities) over which the Group has the power to govern the financial and operational policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group (refer to note 1(h). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Investments in subsidiaries are accounted for at cost in the individual financial statements of FlexiGroup Limited. c. Segment reporting The Group operates predominantly in one business segment (financial services) and one geographical segment (Australasia). d. Foreign currency translation Functional and presentation currency i. Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘’the functional currency”). The consolidated financial statements are presented in Australian dollars, which is FlexiGroup Limited’s functional and presentation currency. ii. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investments in foreign operations. Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets such as equities classified as available-for-sale financial assets are included in the fair value reserve in equity. 48 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 1. Summary of significant accounting policies (continued) iii. Group companies The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of the balance sheet income and expenses for each income statement are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions) and • all resulting exchange differences are recognised as a separate component of equity On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, a proportionate share of such exchange differences are recognised in the income statement as part of the gain or loss on sale where applicable. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entities and translated at the closing rate. e. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances and amounts collected on behalf of third parties. Revenue is recognised for the major business activities as follows: i. Lease finance interest revenue Lease finance interest revenue is recognised by applying discount rates implicit in the leases to lease balances receivable at the beginning of each payment period. Secondary lease income, including rental income on extended rental assets, is recognised when it is due on an accruals basis. Proceeds from the sale of rental assets are recognised upon disposal of the relevant assets. Interest income on customer loans ii. Interest income on loans is recognised in the income statement using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset and of allocation of the interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. iii. Equipment protection plan revenue The Group operates an equipment protection and debt waiver plan entitled Protect Plan. Protect Plan revenue is recognised in the month it is due on an accruals basis. A provision for outstanding expected claims is recognised in the balance sheet for the cost of Protect Plan claims which have been incurred at year end, but have not yet been notified to the Group, or which have been notified to the Group but not yet paid. iv. Mobile broadband revenue Revenue relating to the sale of modems is recognised when the Group entity has delivered the goods to the dealer. Delivery does not occur until the products have been shipped to the specified location, the risks of obsolescence and loss have transferred to the dealer and the dealer has accepted the products. Revenue relating to the broadband contracts is recognised on an accruals basis over the life of the contract. v. Cheque guarantee revenue Revenue is recognised when the service associated with the guarantee has been provided on an accruals basis. All monthly fees are recognised in revenue in the month to which they relate. vi. Interest income – bank accounts/loss reserves Interest income on bank and loss reserve balances is recognised on an accruals basis. f. Government grants Grants from the government are recognised at their fair value where there is reasonable assurance that the grant will be received and the group will comply with all the attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate. Government grants relating to the purchase of property, plant and equipment are included in current and non-current liabilities as deferred income and are credited to the income statement on a straight-line basis over the expected lives of the related assets. 49 Income tax g. The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting or taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. Tax consolidation legislation FlexiGroup Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, FlexiGroup Limited, and the controlled entities in the tax consolidated group account for their own current and deferred tax accounts. These tax amounts are measured as if each entity in the tax consolidation was a stand-alone taxpayer in its own right. In addition to its own current and deferred tax amounts, FlexiGroup Limited also recognises the current tax liabilities (assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidation group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group. Details about the tax funding agreement are disclosed in note 6. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidation entities. h. Business combinations The purchase method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, equity instruments issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable to the acquisition. Where equity instruments are issued in an acquisition, the fair value of the instruments is their published market price as at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill (refer to note 1(r)). If the cost of acquisition is less than the Group’s share of the fair value of the identifiable net assets of the subsidiary acquired, the difference is recognised directly in the income statement, but only after a reassessment of the identification and measurement of the net assets acquired. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. 50 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 1. Summary of significant accounting policies (continued) i. Lease receivables – Group is lessor The Group has classified its leases as finance leases for accounting purposes. Under a finance lease, substantially all the risks and benefits incidental to the ownership of the leased asset are transferred by the lessor to the lessees. The Group recognises at the beginning of the lease term an asset at an amount equal to the aggregate of the present value (discounted at the interest rate implicit in the lease) of the minimum lease payments and an estimate of the value of any unguaranteed residual value expected to accrue to the benefit of the Group at the end of the lease term. i. Unearned interest Unearned interest on leases and other receivables is brought to account over the life of the lease contract based on the interest rate implicit in the lease. Initial direct transaction costs ii. Initial direct costs (leases) or transaction costs (loans) incurred in the origination of leases and loans are included as part of receivables in the balance sheet and are amortised in the calculation of lease income and interest income. j. Loan receivables Loan receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides loans to customers via products such as personal loans and Certegy Ezi-Pay. k. Allowance for losses The collectibility of lease and loan receivables is assessed on an ongoing basis. A provision is made for losses based on historical roll rates of arrears and the current delinquency position of the portfolio. l. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, using the effective interest rate method, less provision for impairment. Trade receivables are generally due for settlement within 30 days. Collectibility of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 60 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of the impairment loss is recognised in the income statement. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. m. Leases – used by the Group Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s inception at the lower of the fair value of the leased property or the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other long-term payables. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease term. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases (note 29). Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. In the event of the Group sub-leasing any of its operating leases, the lease income is recognised on a straight-line basis over the lease term. n. Cash and cash equivalents For cash flow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. 51 Investments o. The Group classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and, in the case of assets classified as held-to-maturity, re-evaluates this designation at each report date. Available-for-sale financial assets and financial assets at fair value through profit and loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Gains or losses arising from changes in the fair value of the “financial assets at fair value through profit or loss” category, including interest and dividend income, are presented in the income statement within other income or other expenses in the period in which they arise. Financial assets at fair value through profit or loss i. Financial assets at fair value through profit or loss are financial assets held for trading which are acquired principally for the purpose of selling in the short term with the intention of making a profit. Derivatives are also categorised as held for trading unless they are designated as hedges. The Group had no assets in this category at 30 June 2009. ii. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of selling the receivables. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date (notes 8, 9, 11 and 12). iii. Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. The Group had no assets in this category at 30 June 2009. iv. Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. The Group had no assets in this category at 30 June 2009. Regular purchases and sales of investments are recognised on trade-date (the date on which the Group commits to purchase or sell the asset). Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Changes in fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences are recognised in profit or loss and other changes in carrying amount are recognised in equity. Changes in the fair value of other monetary and non-monetary securities classified as available-for-sale are recognised in equity. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement as gains and losses from investment securities. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models making maximum use of market inputs and relying as little as possible on entity-specific inputs. The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered in determining whether the security is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit and loss) is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments classified as available-for-sale are not reversed through the income statement. p. Inventories i. Rental equipment Rental equipment is carried at the lower of cost and net realisable value and comprises returned rental equipment and items remaining on rental after the end of the contractual rental period. 52 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 1. Summary of significant accounting policies (continued) ii. Mobile broadband stock Mobile broadband stock is stated at the lower of cost and net realisable value. q. Plant and equipment Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of plant and equipment. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All repairs and maintenance are charged to the income statement during the reporting period in which they are incurred. Depreciation is calculated using the diminishing value method to allocate their cost or revalue amounts, net of their residual values, over their estimated useful lives, as follows: Depreciable assets Plant and equipment Depreciation rate % 20–40 The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is great than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount of the asset disposed. These are included in the income statement. r. Intangibles i. Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortised. Instead, goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. ii. Software Costs incurred on software development projects (relating to the design and testing of new or improved software products) are recognised as intangible assets when it is probable that the project will be a success considering its commercial and technical feasibility and its costs can be measured reliably. The expenditure capitalised comprises all directly attributable costs, including direct labour. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Capitalised development costs are recorded as an intangible asset and amortised from the point at which the asset is ready for use over its useful life, which is assessed at 2.5 to 5 years. iii. Contractual payments for access rights Payments to dealers or dealer groups that result in the group acquiring a preference to supply services are capitalised as intangible assets, and amortisation commences from the start of the supply service period. The carrying value is tested for impairment annually or more frequently if events or changes in circumstances indicate it might be impaired. iv. Merchant relationships Merchant relationships acquired as part of a business combination are recognised separately from goodwill. The assets are measured at fair value at the date of acquisition less accumulated amortisation and impairment losses. Amortisation is calculated based on the timing of the projected cash flows of the relationships, generally 5 years. v. Credit software Credit software assets acquired as part of a business combination represent software to assist in the assessment of the credit-worthiness of customers. The assets are measured at fair value at the date of acquisition less accumulated amortisation and impairment losses. Amortisation is calculated based on the expected useful life of the software, generally 4 years. Impairment of assets s. Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are 53 separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. t. Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. u. Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities, which are not an incremental cost relating to the actual draw-down of the facility, are recognised as prepayments and amortised on a straight-line basis over the term of the facility. Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in other income or other expenses. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. v. Borrowing costs Borrowing costs are expensed. w. Provisions Provisions for legal claims and service warranties are recognised when the Group has a present legal or constructive obligation as a result of past events if it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. The discount rate used to determine the present value reflects current market assessments of the value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense. x. Employee benefits i. Wages and salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating vesting sick leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. ii. Long service leave The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match as closely as possible the estimated future cash outflows. iii. Profit-sharing and bonus plans The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. iv. Share-based payments Share-based compensation benefits are provided to certain employees. Information relating to these schemes is set out in note 38. The fair value of such instruments is recognised as an expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the relevant party becomes unconditionally entitled to the instruments. Fair values at grant date are independently determined using a binomial tree option pricing methodology that takes into account the exercise price, the term of the options, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the options. 54 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 1. Summary of significant accounting policies (continued) The fair value of the instruments granted is adjusted to reflect market vesting conditions, but excludes the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number and value of instruments that are expected to become exercisable. The share-based payment expense recognised each period takes into account the most recent estimate. Upon the exercise of instruments, the balance of the share-based payments reserve relating to those instruments is transferred to share capital and the proceeds received (if any), net of any directly attributable transaction costs, are credited to share capital. y. Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. If the entity reacquires its own equity instruments, e.g. as the result of a share buy-back, those instruments are deducted from equity and the associated shares are cancelled. No gain or loss is recognised in the profit or loss and the consideration paid including any directly attributable incremental costs (net of income taxes) is recognised directly in equity. z. Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the financial year but not distributed at balance date. aa. Earnings per share i. Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. ii. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been used for no consideration in relation to dilutive potential ordinary shares. ab. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from taxation authorities. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. In the balance sheets receivables and payables are stated inclusive of the amount of GST receivable or payable, with the exception of lease receivables, which are shown net of GST on the rentals not yet due. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the taxation authority are presented as operating cash flows. ac. Rounding of amounts The Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Class Order to the nearest thousand dollars. ad. New accounting standards and UIG interpretations Certain new accounting standards and UIG interpretations have been published that are not mandatory for 30 June 2009 reporting periods. The Group and the parent entity’s assessment of the impact of these new standards and interpretations is set out below. AASB 8 Operating Segments and AASB 2007-3 Amendments to Australian Accounting Standards arising from AASB 8 (effective 1 January 2009) AASB 8 and AASB 2007-3 are effective for annual reporting periods commencing on or after 1 January 2009. AASB 8 will result in a significant change in the approach to segment reporting, as it requires adoption of a “management approach” to reporting on the financial performance. The information being reported will be based on what the key decision-makers use internally for evaluating segment performance and deciding how to allocate resources to operating segments. Application of AASB 8 may result in different segments, segment results and different types of information being reported in the segment note of the financial report. However, it will not affect any of the amounts recognised in the financial statements. The Group will apply the revised standard from 1 July 2009. 55 Revised AASB 101 Presentation of Financial Statements and AASB 2007-8 Amendments to Australian Accounting Standards arising from AASB 101 (effective 1 January 2009) The revised AASB 101 that was issued in September 2007 is applicable for annual reporting periods beginning on or after 1 January 2009. It requires the presentation of a statement of comprehensive income and makes changes to the statement of changes in equity but will not affect any of the amounts recognised in the financial statements. If an entity has made a prior period adjustment or a reclassification of items in the financial statements, it will also need to disclose a third balance sheet (statement of financial position), this one being as at the beginning of the comparative period. The Group will apply the revised standard from 1 July 2009. AASB 2008-1 Amendments to Australian Accounting Standard – Share-based Payments: Vesting Conditions and Cancellations (effective 1 January 2009) AASB 2008-1 was issued in February 2008 and will become applicable for annual reporting periods beginning on or after 1 January 2009. The revised standard clarifies that vesting conditions are service conditions and performance conditions only and that other features of a share-based payment are not vesting conditions. It also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group will apply the revised standard from 1 July 2009, but it is not expected to affect the accounting for the Group’s share-based payments. Revised AASB 3 Business Combinations, AASB 127 Consolidated and Separate Financial Statements and AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127 (effective 1 July 2009) The revised AASB 3 continues to apply the acquisition method to business combinations, but with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently remeasured through the income statement. There is a choice on an acquisition- by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition related costs must be expensed. This is different to the Group’s current policy which is set out in note 1(h) above. The revised AASB 127 requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses, see note 1(b). The standard also specifies the accounting when control is lost. Any remaining interest in the entity is remeasured to fair value, and a gain or loss is recognised in profit or loss. Under the Group’s current accounting policy, the retained interest in the carrying amount of the former subsidiary’s assets and liabilities becomes the cost of investment. If the investment is accounted for as an available-for-sale financial asset, it is subsequently revalued to fair value; however, any revaluation gain or loss is recognised in the available-for-sale investments revaluation reserve. The Group will apply the revised standards prospectively to all business combinations and transactions with non-controlling interests from 1 July 2009. Revised AASB 123 Borrowing Costs and AASB 2007-6 Amendments to Australian Accounting Standards arising from AASB 123 (effective 1 January 2009) The revised AASB 123 has removed the option to expense all borrowing costs and when adopted will require the capitalisation of all borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. The Group will apply this standard from 1 July 2009, however, there will be no impact on the financial report of the Group, as the Group does already capitalise borrowing costs relating to qualifying assets. AASB 2008-6 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project (effective 1 July 2009) The amendments to AASB 5 Discontinued Operations and AASB 1 First-Time Adoption of Australian Equivalents to International Financial Reporting Standards are part of the IASB’s annual improvements project published in May 2008. They clarify that all of a subsidiary’s assets and liabilities are classified as held-for-sale if a partial disposal sale plan results in loss of control. Relevant disclosures should be made for this subsidiary if the definition of a discontinued operation is met. The Group will apply the amendments prospectively to all partial disposals of subsidiaries from 1 July 2009. AASB 2008-7 Amendments to Australian Accounting Standards Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (effective 1 July 2009) In July 2008, the AASB approved amendments to AASB 1 First-Time Adoption of International Financial Reporting Standards and AABS 127 Consolidated and Separate Financial Statements. The Group will apply the revised rules prospectively from 1 July 2009. After that date, all dividends received from investments in subsidiaries, jointly controlled entities or associates will be recognised as revenue, even if they are paid out of pre-acquisition profits, but the investments may need to be tested for impairment as a result of the dividend payment. Under the entity’s current policy, these dividends are deducted from the cost of the investment. Furthermore, when a new intermediate parent entity is created in internal reorganisations, it will measure its investment in subsidiaries at the carrying amounts of the net assets of the subsidiary rather than the subsidiary’s fair value. 56 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 1. Summary of significant accounting policies (continued) AASB 2008-8 Amendment to IAS 39 Amendment to Australian Accounting Standards Eligible Hedged Items (effective 1 July 2009) AASB 2008-8 amends AASB 139 Financial Instruments: Recognition and Measurement and must be applied retrospectively in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. The amendment makes two significant changes. It prohibits designating inflation as a hedgeable component of a fixed rate debt. It also prohibits including time value in the one-sided hedged risk when designating options as hedges. The Group will apply the amended standard from 1 July 2009. It is not expected to have a material impact on the Group’s financial statements. AASB Interpretation 16 Hedges of a Net Investment in a Foreign Operation (effective 1 October 2008) AASB-I 16 clarifies which foreign currency risks qualify as hedged risk in the hedge of a net investment in a foreign operation and that hedging instruments may be held by any entity or entities within the group. It also provides guidance on how an entity should determine the amounts to be reclassified from equity to profit or loss for both the hedging instrument and the hedged item. The Group will apply the interpretation prospectively from 1 July 2009, however, it is not expected to impact the Group as it currently has no such hedges. AASB Interpretation 17 Distribution of Non-cash Assets to Owners and AASB 2008-13 Amendments to Australian Accounting Standards arising from AASB Interpretation 17 (effective 1 July 2009) AASB-I 17 applies to situations where an entity pays dividends by distributing non-cash assets to its shareholders. These distributions will need to be measured at fair value and the entity will need to recognise the difference between the fair value and the carrying amount of the distributed assets in the income statement on distribution. This is different to the Group’s current policy which is to measure distributions of non-cash assets at their carrying amounts. The interpretation further clarifies when a liability for the dividend must be recognised and that it is also measured at fair value. The Group will apply the interpretation prospectively from 1 July 2009, however, it is not expected to have any impact on the financial statements. 2. Critical accounting estimates Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed below. i. Estimation of unguaranteed residuals on leases The Group estimates the value of unguaranteed lease residuals based on its prior experience for similar contracts. ii. Allowance for losses The Group estimates losses incurred on its loans and lease receivables in accordance with the policy set out in note 1(k). iii. Resetting of the Group’s tax cost base As a result of the creation of a new tax consolidation Group on 11 December 2006 following the acquisition of Flexirent Holdings Pty Limited by FlexiGroup Subco Pty Limited, the Group is required to reset for taxation purposes the tax cost base of each of its assets. In order to complete this task, the Group is in the process of obtaining formal valuation of each asset, as well as tax advice on the process for resetting the tax cost base. It is possible that the Group will also seek a private ruling from the Australian Taxation Office before resetting its tax cost base. At this time it is not possible to quantify the impact of resetting the tax base, however, based on information currently available to the Directors, it is unlikely that a loss will arise, and it is possible that a one-off gain will arise for the Group. Any adjustment arising from the impact of resetting the tax cost base will be recognised when the Directors are satisfied that the adjustment is probable. iv. Assessment of impairment of goodwill and investment in subsidiaries Under the accounting standards, the Group is required to perform an annual assessment as to whether there has been any impairment of its goodwill. In addition, the Group is required to perform an impairment assessment of other assets in the event it identifies an indicator of impairment. Details of the basis of performance of the assessment are set out in notes 15 and 17 respectively. 3. Segment information The Group operates predominantly in one business segment (financial services) and one geographical segment (Australasia). 57 4. Revenue Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 From continuing operations Gross interest and finance lease income 136,271 135,184 Amortisation of initial direct transaction costs (note 1(i),(ii)) (25,422) (25,287) Interest on leases and loan receivables 110,849 109,897 Other portfolio income 67,517 49,843 – – – – – – – – – – Other revenue Interest income – Banks Dividend income Sundry income 5. Expenses 4,726 5,525 – – 14,020 23,924 1,402 1,515 – – 184,494 166,780 14,020 23,924 Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 Profit before income tax includes the following specific expenses: Depreciation – Plant and equipment Amortisation – Software – Merchant relationships – Credit software Total depreciation and amortisation expenses Bad debts written off Movement in allowance for losses Losses on loans and receivables 1,427 979 2,790 2,185 573 150 4,940 22,990 4,165 27,155 – – 3,164 20,525 1,385 21,910 – – – – – – – – – – – – – – – – 58 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 6. Income tax expense (a) Income tax expense Current tax Deferred tax Income tax expense is attributable to: Profit from continuing operations Aggregate income tax expense Deferred income tax (revenue) expense included in income tax expense comprises: Decrease/(increase) in deferred tax assets (note 14) (Decrease)/increase in deferred tax liabilities (note 23) Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 14,583 14,806 (175) 212 14,408 15,018 14,408 14,408 15,018 15,018 (1,015) 840 (175) (83) 295 212 (507) 507 (507) 507 – – – – – – 507 – – 507 507 507 (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax Tax at the Australian tax rate of 30% (2008: 30%) 47,210 14,163 47,274 14,182 64,020 19,206 (270,274) (81,082) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Share-based payments Non-taxable intergroup dividends Impairment of investment in subsidiaries Amortisation of intangibles Sundry items Difference in overseas tax rates 647 – – 118 – – 172 (45) – – – 104 14,408 14,933 – 85 14,408 15,018 (4,206) (7,177) (15,000) 88,259 – – – – – – – – – – (c) Tax consolidation legislation FlexiGroup Limited and its wholly-owned Australian controlled entities implemented the tax consolidation legislation from December 2006. The accounting policy on implementation of the legislation is set out in note 1(g). On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing-agreement which, in the opinion of the Directors, limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity, FlexiGroup Limited. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate FlexiGroup Limited for any current tax payable assumed and are compensated by FlexiGroup Limited for any current tax receivable and deferred tax assets relating to the unused tax losses or unused tax credits that are transferred to FlexiGroup Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. The amounts receivable/payable under the tax funding agreement are due upon receipt of the funding advice from the head entity which is issued as soon as practicable after the end of the financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. The funding amounts are recognised as current inter-company receivables (note 8). 59 7. Cash and cash equivalents Cash at bank and on hand Reconciliation to cash at the end of the year The above figures reconcile to cash at the end of the financial year, as shown in the statement of cash flows, as follows: Consolidated Parent entity 2009 $’000 2008 $’000 52,583 59,426 2009 $’000 – – 2008 $’000 Balances as above Balances per statement of cash flows 52,583 52,583 59,426 59,426 – – – – The weighted average interest rate on this balance is 2.96% (2008: 7.00%). Included in cash at bank are amounts of $15.9 million (2008: $13.2 million) which are held as part of the Group’s funding arrangements and are not available to the Group. 8. Current assets – Receivables Lease receivables Gross rental receivables Guaranteed residuals Unguaranteed residuals Unearned income Unamortised initial direct transaction costs Net lease receivables Allowance for losses Other debtors Inter-company receivables 9. Current assets – Customer loans Loan receivables Allowance for losses Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 276,116 312,263 550 7,547 640 9,290 (83,180) (112,223) 20,261 21,238 221,294 231,208 (5,148) (3,627) 216,146 227,581 3,800 – 931 – 219,946 228,512 – – – – – – – – – – – – – – – – – – 11,201 11,201 12,551 12,551 Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 99,403 10,719 (2,367) 97,036 (395) 10,324 – – – – – – 60 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 10. Current assets – Inventories Returned rental equipment Extended rental assets Mobile broadband stock 11. Non-current assets – Receivables Lease receivables Gross rental receivables Guaranteed residuals Unguaranteed residuals Unearned income Unamortised initial direct transaction costs Net lease receivables Allowance for losses Consolidated Parent entity 2009 $’000 46 3,012 1,961 5,019 2008 $’000 79 2,812 – 2,891 2009 $’000 2008 $’000 – – – – – – – – Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 212,597 264,920 1,449 4,546 1,567 11,341 (40,065) (65,944) 10,439 11,173 188,966 223,057 (4,407) (3,649) 184,559 219,408 – – – – – – – – – – – – – – – – 12. Non-current assets – Customer loans Loan receivables Allowance for losses Consolidated Parent entity 2009 $’000 61,219 (1,813) 59,406 2008 $’000 49,352 (1,899) 47,453 2009 $’000 2008 $’000 – – – – – – (a) Fair values The fair values and carrying values of non-current receivables and loans of the Group approximate the carrying amount stated above based on the implicit rates in the underlying contracts. (b) Credit risk The Group’s exposure to credit risk is set out in note 39. 61 13. Non-current assets – Plant and equipment Consolidated $’000 Parent entity $’000 Plant and equipment Year ended 30 June 2008 Opening net book amount Exchange differences Additions Disposals Depreciation charge Closing net book amount At 30 June 2008 Cost Accumulated depreciation Net book amount Year ended 30 June 2009 Opening net book amount Exchange differences Purchase of Certegy business (note 33) Additions Disposals Depreciation charge Closing net book amount At 30 June 2009 Cost Accumulated depreciation Net book amount – – – – – – – – – 3,325 (4) 1,570 (32) (979) 3,880 8,752 (4,872) 3,880 3,880 – (32) – 437 – 1,659 – (325) – (1,427) – 4,192 – 7,557 – (3,365) – 4,192 – 62 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 14. Non-current assets – Deferred tax assets Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 The balance comprises temporary differences attributable to: Amounts recognised in profit or loss Doubtful debts Employee entitlements Provisions IPO expenses Total deferred tax assets Movements Opening balance at 1 July Credited/(charged) to the income statement Asset recognised on acquisition of Certegy business Closing balance at 30 June Deferred tax assets to be recovered within 12 months 3,769 1,781 792 1,014 7,356 6,183 1,015 158 7,356 5,000 Deferred tax assets to be recovered after more than 12 months 2,356 7,356 15. Non-current assets – Goodwill 2,583 1,418 661 1,521 6,183 6,100 83 – 6,183 2,486 3,697 6,183 – – – – – – 1,014 1,014 1,521 (507) – – 1,014 507 507 1,014 1,521 1,521 2,028 (507) 1,521 507 1,014 1,521 Goodwill Goodwill at 1 July Acquisition of subsidiary (note 33) Balance at 30 June Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 50,159 29,717 79,876 50,159 – 50,159 – – – – – – The Group is required to test the balance of goodwill annually for impairment. Impairment would arise if the recoverable amount of the goodwill were lower than its carrying amount. The recoverable amount of the goodwill for this purpose is the higher of its value in use or its fair value. Currently the Group performs this assessment based on fair value calculations. The Group refers to the share price of the company as traded on the Australian Securities Exchange to assess the fair value calculation. Based on recent trading in the Group’s shares, no impairment arises. If the share price of the Company were to trade consistently below 50 cents for a period, the Company would be required to consider performing a value-in-use calculation to determine if an impairment arose. 63 16. Non-current assets – Intangible assets Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 Software Balance at 1 July Acquisition of subsidiary Additions Exchange differences Disposals Amortisation charge Balance at 30 June Access rights Balance at 1 July (note 1(r)(iii)) Balance at 30 June Merchant relationships Balance at 1 July Purchase of Certegy business (note 33) Amortisation charge Balance at 30 June Credit software Balance at 1 July Purchase of Certegy business (note 33) Amortisation charge Balance at 30 June 7,053 351 4,691 (22) (307) (2,790) 8,976 1,000 1,000 – 4,300 (573) 3,727 – 900 (150) 750 4,446 – 4,792 – – (2,185) 7,053 1,000 1,000 – – – – – – – – 17. Non-current assets – Other financial assets 14,453 8,053 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Investment in subsidiary (note 32) Allowance for impairment Opening balance Impairment charge recognised in 2008 Reversal of impairment charge in 2009 Closing balance Net investment in subsidiary Shares held in Trust under the FlexiGroup Tax Deferred Employee Share Plan Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 – – – – – – – – – – – – – – – – 429,198 429,198 294,198 – – 294,198 (50,000) – 244,198 294,198 185,000 135,000 3,045 – 188,045 135,000 The recoverable amount of the investment in subsidiaries was determined as the value in use of the subsidiaries to the Group which was assessed to be the higher of the fair value of the asset and its value in use. The value-in-use calculation used cash flow projections for 2010 and beyond this period extrapolated these cash flows using an estimated growth rate of 3.5%. The valuation has been performed using a discount rate of between 14.5% and 15.5%. 64 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 18. Current liabilities – Payables Trade and other payables 19. Current liabilities – Borrowings Secured Loan advances – secured Total secured current borrowings Loss reserve Total current borrowings Consolidated Parent entity 2009 $’000 31,487 31,487 2008 $’000 25,512 25,512 2009 $’000 2008 $’000 – – – – Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 308,109 308,109 235,140 235,140 (31,125) (25,352) 276,984 209,788 – – – – – – – – Assets pledged as security The loans are secured by rentals and payments receivable in respect of the underlying lease and loan receivable contracts. Under the terms of the funding arrangements, some of the funders retain a part of the gross amount funded as security against credit losses on the underlying leases. This amount is referred to as a loss reserve and represents a reduction in the amount borrowed. 20. Current liabilities – Current tax liabilities Income tax 21. Current liabilities – Provisions Protect plan provision Carrying amount at beginning of the year Provisions made during the year Carrying amount at end of the year Employee benefits Long service leave provision Consolidated Parent entity 2009 $’000 4,376 2008 $’000 8,194 2009 $’000 3,846 2008 $’000 6,694 Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 667 33 700 309 1,009 554 113 667 – 667 – – – – – – – – – – For a description of the nature of the protect plan provision refer to note 1(e)(iii)). 65 22. Non-current liabilities – Borrowings Secured Loan advances – secured Total secured non-current borrowings Loss reserve Total non‑current borrowings Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 283,645 283,645 286,042 286,042 (18,146) (17,521) 265,499 268,521 – – – – – – – – Refer to note 19 for detail on assets pledged as security. Financing arrangements Unrestricted access was available at balance date to the following lines of credit: Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 Total loan facilities available Loan facilities used at balance date Loan facilities unused at balance date 754,854 689,177 (591,754) (521,182) 163,100 167,995 – – – – – – Borrowings (current and non-current) maturity analysis: 2009 Floating rate Fixed rate 1 year or less Over 1 to 2 years Over 2 to 3 years Over 3 to 4 years Over 4 to 5 years Total 2008 Floating rate Fixed rate 1 year or less Over 1 to 2 years Over 2 to 3 years Over 3 to 4 years Over 4 to 5 years Total Loan advances $’000 105,743 241,561 160,585 81,175 2,277 413 Loss reserve $’000 Net borrowings $’000 – 105,743 (31,125) 210,436 (13,670) 146,915 (4,002) (401) (73) 77,173 1,876 340 591,754 (49,271) 542,483 Loan advances $’000 53,277 215,543 146,896 100,913 4,102 451 Loss reserve $’000 Net borrowings $’000 – 53,277 (25,352) 190,191 (12,968) 133,928 (3,886) (608) (59) 97,027 3,494 392 521,182 (42,873) 478,309 66 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 23. Non-current liabilities – Deferred tax liabilities The balance comprises temporary differences attributable to: Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 Amounts recognised in profit or loss Difference between lease principal to be returned as assessable income and depreciation on leased assets to be claimed as a tax deduction Initial direct transaction costs Movements Opening balance at 1 July Credited/(charged) to the income statement Closing balance 30 June Deferred tax liabilities Deferred tax liabilities to be settled within 12 months 17,059 8,411 25,470 15,722 8,908 24,630 24,630 24,335 840 25,470 25,470 11,623 295 24,630 24,630 12,322 12,308 24,630 – – – – – – – – – – – – – – – – – – – – Deferred tax liabilities to be settled after more than 12 months 13,847 25,470 24. Non-current liabilities – Provisions Employee benefits – long service leave Consolidated Parent entity 2009 $’000 522 2008 $’000 332 2009 $’000 – – 2008 $’000 67 25. Contributed equity (a) Share capital Ordinary shares – fully paid (b) Movement in ordinary share capital Parent entity 2009 Shares 2008 Shares 227,947,728 224,947,728 Number of shares Consolidated entity $’000 Parent entity $’000 1 July 2007 – ordinary shares 216,962,403 29,422 435,322 16 May 2008 – dividend reinvestment plan issues at $0.607425 7,985,325 4,850 4,850 30 June 2008 balance 224,947,728 34,272 440,172 13 October 2008 – issue of shares as part consideration for Certegy acquisition Treasury shares (note 25e) 30 June 2009 balance 3,000,000 – 990 – 990 3,045 227,947,728 35,262 444,207 (c) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in persons or by proxy is entitled to one vote, and upon a poll each share is entitled to one vote. (d) Options, performance rights and deferred shares Information relating to the FlexiGroup Employee Options, Performance Rights Plan and Deferred Share Plan, including details of options, performance rights and deferred shares issued, exercised and lapsed during the financial year and options, performance rights and deferred shares outstanding at the end of the financial year, is set out in note 38. (e) Treasury shares Treasury shares are shares in FlexiGroup Limited that are held by the FlexiGroup Tax Deferred Employee Share Plan Trust for the purposes of issuing shares under the FlexiGroup Long Term Incentive Plan (see note 38 for further information). Date Details Number of shares $’000 Balance at 1 July 2007 and 30 June 2008 Opening balance 2 December 2008 23 December 2008 29 June 2009 30 June 2009 Acquisition of shares by the Trust Acquisition of shares by the Trust Acquisition of shares by the Trust Balance 10,947,500 519,597 1,440,403 7,500,000 1,487,500 519 331 1,725 989 3,564 (f) Capital risk management The Group’s and parent entity’s objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. Consistent with others in the industry, the Group and parent entity monitor capital on the basis of its gearing ratio. In order to maintain or adjust its capital structure, the Group considers its issue of new capital, return of capital to shareholders and dividend policy as well as its plans for acquisition or disposal of assets. 68 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 26. Reserves and retained profits (a) Reserves Share-based payment reserve (note 1 x(iv)) Foreign currency translation reserve (note 1 d(ii)) Movements Share-based payments reserve Balance at 1 July Share-based payments expense for the year Balance at 30 June Movements Foreign currency translation reserve Balance at 1 July Currency translation differences arising during the year Balance at 30 June (b) Retained profits Movements in retained profits were as follows: Balance at 1 July Net profit/(loss) for the year Dividends Balance at 30 June Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 (2,850) (113) (2,963) (3,242) 392 (2,850) (382) 269 (113) (3,242) (382) (3,624) (5,397) 2,155 (3,242) 185 (567) (382) 1,303 1,303 – – 1,303 1,303 1,303 1,303 – – 1,303 1,303 – – – – – – 67,997 32,802 59,663 (299,097) (4,901) 32,256 64,020 (270,274) (14,019) (23,922) (14,019) (23,922) 86,780 67,997 (249,096) (299,097) (c) Nature and purpose of reserves (i) Foreign currency translation reserve Foreign currency translation of the foreign controlled entities is taken to the foreign currency translation reserve as described in note 1(d). The reserve is recognised in profit and loss when the net investment is disposed of. (ii) Share-based payment reserve The share-based payment reserve is used to recognise: • • • the fair value of options and rights issued to Directors and employees but not exercised the fair value of shares issued to Directors and employees other share-based payment transactions 69 27. Dividends (a) Ordinary shares Special dividend of 3 cents (2008: $nil) per fully paid share paid on 9 December 2008 Fully franked based on tax paid @ 30% – 3 cents per share 6,897 – Final dividend for the year ended 30 June 2007 of 5.5 cents per fully paid share paid on 24 October 2007 Fully franked based on tax paid @ 30% – 5.5 cents per share – 11,961 Parent entity 2009 $’000 2008 $’000 Interim dividend for the year ended 30 June 2009 of 3 cents (2008: 5.5 cents) per fully paid share paid 15 April 2009 (2008: 16 May 2008) Fully franked based on tax paid @ 30% – 3 cents (2008: 5.5 cents) per share (b) Dividends not recognised at year end In addition to the above dividends, since the year end the Directors have recommended the payment of a final dividend of 3 cents per fully paid ordinary share (2008: nil), fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend expected to be paid on 15 October 2009 out of retained profits as at 30 June 2009 but not recognised as a liability at year end is 7,122 14,019 11,961 23,922 7,182 7,182 – – (c) Franked dividends Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 Franking credits available for subsequent financial years based on a tax rate of 30% (2008: 30%) 23,332 20,714 23,332 20,714 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: (a) franking credits that will arise from the payment of the amount of the provision for income tax (b) franking debits that will arise from the payment of dividends recognised as liability at the reporting date and (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date The consolidated amounts include franking credits that would be available to the parent entity if distributable profits of subsidiaries were paid as dividends. The impact on the franking account of the dividend recommended by the Directors since year end, but not recognised as a liability at year end, will be a reduction in the franking account of $3,078,191 (2008: $nil). 70 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 28. Key Management Personnel disclosures a. Directors The following persons were Directors of FlexiGroup Limited during the financial year: M Jackson J DeLano A Abercrombie R J Skippen R Dhawan (Chairman – Non-Executive Director) (Executive Director) (Non-Executive Director) (Non-Executive Director) (Non-Executive Director) b. Other Key Management Personnel The following persons also had authority and responsibility for planning, directing and controlling the activities of the Group during the financial year: J DeLano G McLennan N Roberts D Klotz P Laughton Chief Executive Officer Chief Financial Officer Head of National Sales Head of Operations Chief Information Officer Flexirent Capital Pty Ltd Flexirent Capital Pty Ltd Flexirent Capital Pty Ltd Flexirent Capital Pty Ltd Flexirent Capital Pty Ltd All of the above persons were also Key Management Persons during the year ended 30 June 2008, except for G McLennan who commenced employment with the Group on 1 October 2008. P McMahon (Chief Financial Officer) was a Key Management Person in the year ended 30 June 2008. c. Key Management Personnel Compensation Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Consolidated Parent entity 2009 $ 2008 $ 2009 $ 2008 $ 3,571,104 2,933,052 174,747 200,347 4,585 6,983 1,357,079 1,474,750 5,107,515 4,615,132 – – – – – – – – – – Detailed remuneration disclosures are provided in sections A–E of the Remuneration Report on pages 17–33. 71 d. Equity instrument disclosures relating to Directors and Key Management Personnel i. Options, performance rights and deferred shares holdings 2009 Name Balance at start of year Granted as compensation Exercised Other changes Balance at end of year Vested and exercisable Unvested J DeLano (Chief Executive Officer) 15,224,820 7,500,000 Other Key Management Personnel G McLennan – 1,400,000 N Roberts 2,654,000 400,000 D Klotz 2,400,000 500,000 P Laughton 1,550,000 400,000 – – – – – (981,360) 21,743,460 – 21,743,460 – 1,400,000 (376,914) 2,677,086 – – 1,400,000 2,677,086 (170,800) 2,729,200 369,600 2,359,600 (177,664) 1,772,336 – 1,772,336 2008 Name Balance at start of year Granted as compensation Exercised Other changes Balance at end of year Vested and exercisable Unvested J DeLano (Chief Executive Officer) 13,050,000 2,174,820 Other Key Management Personnel P McMahon 2,720,500 – N Roberts 1,654,000 1,000,000 D Klotz 1,400,000 1,000,000 P Laughton 550,000 1,000,000 – – – – – – 15,224,820 – 15,224,820 – – – – 2,720,500 2,654,000 2,400,000 1,550,000 – – – – 2,720,500 2,654,000 2,400,000 1,550,000 ii. Share holdings 2009 Name Non‑Executive Directors M Jackson (Chairman) A Abercrombie R Dhawan RJ Skippen Executive Director Balance at start of year 2,880,549 75,012,278 820,706 378,533 J DeLano (Chief Executive Officer) 3,141,656 Other Key Management Personnel G McLennan N Roberts D Klotz P Laughton – 969,817 50,000 298,500 Received during the year on the exercise of options Other changes during the year Balance at end of year – – – – – – – – – – – – – – – – 2,880,549 75,012,278 820,706 378,533 3,141,656 – 969,817 1,045,000 1,095,000 – 298,500 72 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 28. Key Management Personnel disclosures (continued) 2008 Name Non‑Executive Directors M Jackson (Chairman) A Abercrombie R Dhawan RJ Skippen Executive Director Balance at start of year 1,961,382 65,228,250 732,564 147,104 J DeLano (Chief Executive Officer) 2,880,810 Other Key Management Personnel P McMahon N Roberts D Klotz P Laughton 440,544 500 – 298,500 Received during the year on the exercise of options Other changes during the year Balance at end of year – – – – – – – – – 919,167 2,880,549 9,784,028 75,012,278 88,142 231,429 820,706 378,533 260,846 3,141,656 39,344 969,317 50,000 479,888 969,817 50,000 – 298,500 e. Other transactions with related parties Flexirent Capital Pty Limited has rented premises in Melbourne and Sydney owned by entities associated with Mr A Abercrombie. The rental arrangements for the Sydney and Melbourne premises are based on market terms and conditions and are renewable on the expiry of the lease in 2009. Consolidated Parent entity Rental of Sydney and Melbourne premises 148,909 189,011 2009 $ 2008 $ 2009 $ – – 2008 $ Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 29. Capital and leasing commitments Operating lease commitments Non-cancellable operating leases contracted for but not capitalised in the financial statements due: – within one year – later than one year but not later than five years 2,216 9,509 11,725 2,567 9,015 11,582 Sub-lease payments Future minimum lease payments expected to be received in relation to non-cancellable sub-leases of operating leases 1,824 Capital commitments Leasing assets contracted for at the reporting date but not recognised as liabilities is as follows: – within 1 year 57,783 – – – – – – – – – – – – 73 30. Reconciliation of profit after income tax to net cash inflow from operating activities Profit/(loss) for the year Share-based payments Depreciation and amortisation (Reversal of impairment)/Impairment charge relating to investment in subsidiary Movement in impairment provisions Other non-cash movements Net cash inflow from operating activities before change in assets and liabilities Change in operating assets and liabilities: Consolidated Parent entity 2009 $’000 2008 $’000 2009 $’000 2008 $’000 32,802 32,256 64,020 (270,274) 392 4,940 – 4,165 (133) 2,155 3,164 – – – – – (50,000) 294,198 1,385 112 – – – – 42,166 39,072 14,020 23,924 (Increase)/Decrease in other receivables (2,869) 4,435 2,341 – (Increase)/Decrease in net lease and loan receivables (67,003) (16,410) (Increase)/Decrease in residuals (Decrease)/Increase in funder loans (Increase)/Decrease in loss reserve (Decrease)/Increase in trade and other creditors (Increase)/Decrease in inventories (Decrease)/Increase in protect plan provision 8,746 55,573 (6,398) 5,975 (2,128) 33 (Increase)/Decrease in capitalised initial direct transaction costs 1,711 (Decrease)/Increase in current tax (Decrease)/Increase in deferred tax liabilities (Increase)/Decrease in deferred tax assets (3,818) 840 (1,173) 6,306 (2,649) (6,713) 6,014 75 113 (563) (1,131) 295 (83) – – – – – – – – – – – – – – – – (2,848) (1,485) – – 507 507 Net cash inflow from operating activities 31,655 28,761 14,020 22,946 31. Events occurring after balance date There have been no significant events occurring after the balance sheet date. 74 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 32. Subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(b): FlexiGroup SubCo Pty Limited Flexirent Holdings Pty Limited Flexirent Capital Pty Limited Flexirent SPV No 1 Pty Limited Flexirent SPV No 2 Pty Limited Flexirent SPV No 3 Pty Limited Flexirent SPV No 4 Pty Limited Flexicare Claims Management Pty Limited Flexirent SPV No 6 Pty Limited Subfinco Pty Limited Certegy Ezi-Pay Pty Ltd (formerly Subopco Pty Limited) Flexirent Capital (New Zealand) Limited Flexirent Ireland Group Holdings Limited Flexirent Ireland Limited 33. Business combinations Country of incorporation Percentage of shares held 2009 % 2008 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand Ireland Ireland 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 (a) Summary of acquisition On 13 October 2008 the Group acquired the business of Certegy Australia Pty Ltd and Certegy New Zealand Limited. The acquired business contributed revenues of $17.8m and net loss after tax of $0.5m to the Group for the period from 13 October 2008 to 30 June 2009. It is impracticable to determine the impact on Group revenues and net profit for the year ended on 30 June 2009 had the acquisition occurred on 1 July 2008, due to the different accounting treatment adopted by the previous owner. Details of net assets acquired and goodwill are as follows: Purchase consideration Cash paid by FlexiGroup Limited Debt assumed by FlexiGroup Limited – vendor note payable to Fidelity Information Services Inc – 3 year term FlexiGroup Limited shares issued (3 million shares at 33 cents) Direct costs relating to the acquisition Total purchase consideration Fair value of net identifiable assets acquired (refer to (b) below) Goodwill* $’000 15,027 15,000 990 4,647 35,664 (5,947) 29,717 * The goodwill is attributable to the workforce, profitability, synergies and diversification benefit of the acquired business. The fair values of assets and liabilities acquired are based on discounted cash flow models. No acquisition provisions were created. There were no other acquisitions in the year ended 30 June 2009. 75 Acquiree’s carrying amount $’000 Fair value $’000 788 158 – – – (527) 419 788 158 900 4,300 328 (527) 5,947 (b) Assets and liabilities acquired The assets and liabilities arising from the acquisition are as follows: Plant and equipment Deferred tax asset Intangible assets: credit software Intangible assets: merchant relationships Other Provision for employee entitlements Net identifiable assets acquired 34. Related party transactions a. Parent entity The parent entity of the Group is FlexiGroup Limited. b. Subsidiaries Interests in subsidiaries are set out in note 32. Key Management Personnel compensation Disclosures relating to Key Management Personnel are set out in note 28. Transactions with related parties The following transactions occurred with related parties: Tax consolidation legalisation Current tax payable assumed from wholly-owned tax consolidated entities Loans issued to subsidiaries during the year Consolidated Parent entity 2009 $ 2008 $ 2009 $ 2008 $ – – – – 10,211,347 12,551,009 – 990,000 – – 11,201,347 12,551,009 Outstanding balances arising from provision of services The following balances are outstanding at the reporting date in relation to transactions with related parties. Current receivables Subsidiaries Consolidated Parent entity 2009 $ 2008 $ 2009 $ 2008 $ – – 11,201,347 12,551,009 Related party loans are unsecured, interest free and have no agreed repayment schedules. 76 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 35. Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the parent entity and its related parties: Consolidated Parent entity 2009 $ 2008 $ 2009 $ 2008 $ a. Audit and audit-related services Audit services PricewaterhouseCoopers Australian firm: – Audit and review of financial reports 353,000 470,895 Related practices of PricewaterhouseCoopers Australian firm 18,009 14,000 Audit‑related services PricewaterhouseCoopers Australian firm: – Other assurance services 155,107 104,300 – Due diligence services on transactions 73,049 Total remuneration for audit and audit‑related services 599,165 212,732 801,927 b. Non-audit services Other services PricewaterhouseCoopers Australian firm: Advisory services Taxation services PricewaterhouseCoopers Australian firm: 200,750 – – Tax compliance services 42,245 75,876 – Tax advice on transactions and new operations 233,489 635,914 Related practices of PricewaterhouseCoopers Australian firm 123,962 Total remuneration for taxation services Total remuneration for non‑audit services 399,696 600,446 – 711,790 711,790 Total remuneration of PricewaterhouseCoopers 1,199,611 1,513,717 – – – – – – – – – – – – – – – – – – – – – – – – It is the Group’s policy to employ PricewaterhouseCoopers on assignments additional to its statutory audit duties where PricewaterhouseCoopers’ expertise and experience with the Group are important. These assignments are principally tax advice and due diligence reporting on acquisitions, or where PricewaterhouseCoopers is awarded assignments on a competitive basis. 36. Contingencies Contingent liabilities There are no material contingent liabilities at the date of this report. 37. Earnings per share a. Basic earnings per share Profit from continuing operations attributable to the ordinary equity holders of the Company Profit attributable to the ordinary equity holders of the Company b. Diluted earnings per share Profit from continuing operations attributable to the ordinary equity holders of the Company Profit attributable to the ordinary equity holders of the Company c. Reconciliations of earnings used in calculating earnings per share Basic earnings per share Profit from continuing operations Profit from continuing operations attributable to the ordinary equity holders of the Company used in calculating basic earnings per share Profit attributable to the ordinary equity shareholders of the Company used in calculating basic earnings per share Diluted earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating diluted earnings per share 77 Consolidated 2009 Cents 14.4 14.4 14.2 14.2 2008 Cents 14.8 14.8 14.8 14.8 Consolidated 2009 $ 2008 $ 32,802 32,256 32,802 32,256 32,802 32,256 32,802 32,256 32,802 32,256 Consolidated 2009 Number 2008 Number Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 227,084,714 218,466,492 Adjustments for calculation of diluted earnings per share: Options and performance rights and deferred shares 3,499,608 109,455 Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 230,584,322 218,575,947 38. Share-based payments a. Long Term Incentive Plan The establishment of the FlexiGroup Long Term Incentive Plan (“LTIP”) was approved by the founding shareholders on 20 November 2006. The LTIP is designed to provide relevant employees with an incentive for future performance, with conditions for the vesting and exercise of options, performance rights and deferred shares under the LTIP encouraging those executives to remain with FlexiGroup and contribute to the future performance of the Company. Under the plan, participants are granted either an option, right or deferred shares which only vest if certain performance standards are met. The Board may determine which persons will be eligible to participate in the LTIP from time to time. Eligible persons may be invited to apply to participate in the LTIP. The Board may in its discretion accept such applications. 78 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 38. Share-based payments (continued) Summaries of options, performance rights and deferred shares granted under the plan: 2009 Grant date Expiry date Exercise price $ Balance at start of the period Number Granted during the period Number Exercised during the period Number Forfeited during the period Number Balance at end of the period Number Vested and exercisable at the end of the period Number Consolidated and parent entity – 2009 8/12/06 26/2/07 17/4/07 19/4/07 31/8/07 2/10/07 29/11/07 28/12/07 16/1/08 3/4/08 3/4/08 1/10/08 27/11/08 23/12/08 17/2/09 31/3/09 29/4/09 29/6/09 Total 31/12/11 31/12/12 31/12/11 31/12/12 31/12/11 31/12/11 31/12/12 31/12/12 31/12/13 31/12/11 31/12/12 31/12/12 31/12/12 31/12/13 31/12/11 31/12/12 31/12/11 31/12/12 31/12/13 31/12/12 31/12/13 31/12/12 31/12/13 2/12/18 23/12/18 31/12/12 29/6/19 31/12/13 31/12/14 29/6/19 2.00 21,480,500 2.70 0.00 2,000,000 550,000 2.93 1,400,000 2.53 517,000 2.49 0.00 175,000 2,174,820 1.95 15,000 1.59 50,000 0.58 500,000 0.00 5,042,000 – – – – – – – – – – – 0.00 0.00 0.00 0.00 0.00 0.00 0.00 – – – – – – – 1,700,000 1,960,000 7,500,000 782,500 450,000 200,000 1,037,500 – – – – – – – – – – – – – – – – – – (6,551,735) 14,928,765 (2,000,000) (550,000) – – – – – (92,400) 1,307,600 369,600 (137,722) 379,278 (11,550) 163,450 – 2,174,820 (600) 14,400 (3,300) 46,700 (500,000) – (1,405,184) 3,636,816 – – – – – – – 1,700,000 1,960,000 7,500,000 782,500 450,000 200,000 1,037,500 – – – – – – – – – – – – – 33,904,320 13,630,000 – (11,252,491) 36,281,829 369,600 Weighted average exercise price $nil $0.97 $2.93 79 2008 Grant date Expiry date Exercise price $ Balance at start of the period Number Granted during the period Number Exercised during the period Number Forfeited during the period Number Balance at end of the period Number Vested and exercisable at the end of the period Number Consolidated and parent entity – 2008 8/12/06 26/2/07 17/4/07 19/4/07 31/8/07 2/10/07 29/11/07 28/12/07 16/1/08 3/4/08 3/4/08 Total 31/12/11 31/12/12 31/12/11 31/12/12 31/12/11 31/12/11 31/12/12 31/12/12 31/12/13 31/12/11 31/12/12 31/12/12 31/12/12 31/12/13 31/12/11 31/12/12 31/12/11 31/12/12 31/12/13 31/12/12 31/12/13 2.00 21,579,500 2.70 0.00 2,000,000 550,000 2.93 1,400,000 – – – – 2.53 2.49 0.00 1.95 1.59 0.58 0.00 – – – – – – – 517,000 175,000 2,174,820 15,000 50,000 500,000 5,042,000 25,529,500 8,473,820 Weighted average exercise price $0.26 No options have expired. – – – – – – – – – – – – (99,000) 21,480,500 – – – – – – – – – – 2,000,000 550,000 1,400,000 517,000 175,000 2,174,820 15,000 50,000 500,000 5,042,000 (99,000) 33,904,320 $1.61 – – – – – – – – – – – – The weighted average share price at the date of exercise of options exercised during the year ended 30 June 2009 was nil as no options were exercised during the year (2008: nil). The weighted average remaining contractual life of share options, performance rights and deferred shares outstanding at the end of the year was 5 years (2008: 3.9 years). Fair value of options, performance rights and deferred shares granted Fair values at grant date are independently determined using a binomial tree option pricing methodology that takes into account the exercise price, the term of the options, performance rights and deferred shares, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the options. The model inputs for performance rights and deferred shares granted during the year ended 30 June 2009 included: (a) Exercise price: various per performance rights and deferred shares granted (b) Grant date: various per performance rights and deferred shares granted (c) Expiry date: various per performance rights and deferred shares granted (d) Share price at grant date: various per performance rights and deferred shares granted (e) Expected price volatility of the Company’s shares: 59%–64% (2008: 50%) (f) Expected dividend yield: 6.4%–14.6% (2008: 13%) (g) Risk-free interest rate: various ranging from 2.83% to 5.09% (2008: 6.09% to 6.15%) 80 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 38. Share-based payments (continued) Shares provided on exercise of remuneration options No ordinary shares in the Company were issued as a result of the exercise of any remuneration options. b. Employee share plan The Employee Share Acquisition (Tax Exempt) Plan (“ESAP”) is a general employee share plan pursuant to which grants of shares may be offered to employees of FlexiGroup on terms and conditions as determined by the Board from time to time. The Board is responsible for administering the ESAP in accordance with the ESAP Rules and the terms and conditions of specific grants of shares to participants in the ESAP. The ESAP Rules include the following provisions: Eligibility The Board may determine which persons will be eligible to be offered the opportunity to participate in the ESAP from time to time. The Board may make offers to eligible persons for participation in the ESAP. Terms of offer The Board has the discretion to determine the specific terms and conditions applying to each offer, provided that: The terms of the offer do not vary the disposal restrictions imposed on shares under the ESAP Rules under which shares acquired under the ESAP cannot be transferred, sold or otherwise disposed of until the earlier of: • • • the time when the participant is no longer employed by FlexiGroup or by the Company that was the employer of the participant as at the time the shares were acquired, or the third anniversary of the date on which the shares were acquired, and the offer does not include any provisions for forfeiture of shares acquired under the ESAP in any circumstances It is intended that the ESAP will satisfy the requirements of Division 13A of the relevant Australian tax legislation. Consideration for grant The Board may determine the price at which the shares will be offered to an employee. Shares may be granted at no cost to the employee or the Board may determine that market value or some other price is appropriate. Allocation of shares Shares allocated under the ESAP may be existing shares or newly issued shares. Allocated shares must be held in the name of the employee. Any shares that are issued under the ESAP will rank equally with those traded on the ASX at the time of issue. A participant under the ESAP is entitled to receive distributions/dividends made in respect of, and exercise voting rights attaching to, shares held under the ESAP (whether or not the shares are subject to disposal restrictions). Restrictions on shares Shares acquired under the ESAP will be subject to the disposal restrictions described above. FlexiGroup will implement such arrangements (including a holding lock) as it determines are necessary to enforce this restriction. Once the restriction is removed, and subject to FlexiGroup’s Share Trading Policy, shares acquired under the ESAP may be dealt with freely. Details of FlexiGroup’s Share Trading Policy are in the Corporate Governance Statement. Employee gift offer In December 2006, at the time of listing, all eligible employees of FlexiGroup were offered 500 shares totalling $1,000 based on the listing price of $2. In total, 254 eligible employees took up this offer resulting in an allocation of 127,000 shares. c. Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: Consolidated Parent entity 2009 $ 2008 $ 2009 $ 2008 $ Options, performance rights and/or deferred shares issued under LTIP excluding options granted in favour of certain executives over shares owned by the former shareholders of Flexirent Holdings Pty Limited Options over shares owned by the former shareholders of Flexirent Holdings Pty Limited 88,320 1,545,830 303,680 609,454 392,000 2,155,284 – – – – – – 81 39. Financial risk management Overview The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group has no derivative financial instruments outstanding at 30 June 2009 (2008: nil). The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate and foreign exchange risk, and ageing/credit scorecard analysis for credit risk. Risk management is primarily carried out by the financial analysis, treasury and credit and risk departments. The Group has experienced no material change in its risk exposures since the previous year. Interest rate risk Interest rate risk results principally from the repricing risk or differences in the repricing characteristics of the Group’s receivable portfolio and borrowings. The majority of the Group’s receivables consist of fixed rate consumer and commercial instalment lease contracts. The interest rate is fixed for the life of the contract. Lease contracts are originated with maturities ranging between one and five years and generally require the customer to make equal monthly payments over the life of the contract. Borrowings used to fund the lease asset receivables are also fixed for the term of the lease. The vast majority of leases are funded within two weeks of being settled, with the rental stream discounted at a fixed rate of interest to determine the borrowing amount. Interest relating to the loan note issued to fund the Certegy acquisition is also fixed over the life of the loan, there being no interest rate risk relating to this loan. The remainder of the Group’s receivables relate to the consumer loan portfolio (this portfolio having increased with the acquisition of Certegy) where the interest rates are fixed for the term of the loan. Borrowings to fund the consumer loan portfolio are at a mix of fixed and variable rates and are reset on a monthly basis to market rates, the profile of the debt being significantly shorter than has historically been the case for the loan portfolio. The Group is subject to some interest rate risk on this portfolio which is described below. For sensitivity measurement purposes, a +/–1% pa sensitivity in interest rates has been selected as this is considered realistic given the current level of both short-term and long-term Australian dollar interest rates. Based on the financial instruments held at 30 June 2009, if interest rates had changed by +/–1% from the year-end rates with all other variables held constant, the annualised impact on the consolidated entity’s after-tax profits and equity would have been $27,000 higher/lower (2008: $343,000 lower/higher). Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the New Zealand dollar. The Group also has an operation in Ireland, on which the foreign exchange impact is immaterial. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency and net investments in foreign operations. The Group manages its exposures to the New Zealand dollar by ensuring that its assets and liabilities in New Zealand are predominantly in New Zealand dollars. For sensitivity measurement purposes, a +/–10% sensitivity in foreign exchange rates to the Australian dollar has been selected as this is considered realistic given the current levels of exchange rates, the recent levels of volatility and market expectations for future movements in exchange rates. Based on the financial instruments held at 30 June 2009, had the Australian dollar weakened/strengthened by 10% against the New Zealand dollar compared to year-end rates, with other variables held constant, the consolidated entity’s after-tax profits for the year and equity would have been $682,000 higher/$557,000 lower (2008: $151,000 higher/$124,000 lower), as a result of exposure to exchange rate fluctuations of foreign currency operations. All foreign exchange risk is due to the translation of the New Zealand and Ireland operations on consolidation. 82 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 39. Financial risk management (continued) Consolidated entity at 30 June 2009 Financial assets Carrying amount $’000 Interest rate risk Foreign exchange risk –1% Profit/ Equity $’000 +1% Profit/ Equity $’000 –10% Profit/ Equity $’000 +10% Profit/ Equity $’000 Cash and cash equivalents 52,583 (368) 368 314 (257) Loans and receivables – Fixed interest rate Loss reserve Financial liabilities Payables Borrowings – Fixed interest rate – Floating interest rate Total increase/(decrease) Consolidated entity at 30 June 2008 Financial assets 543,982 49,271 31,487 486,011 105,743 Carrying amount $’000 – (345) – – 740 27 – 345 – – (740) (27) 4,077 309 (3,335) (253) (90) 74 (3,928) – 682 3,214 – (557) Interest rate risk Foreign exchange risk –1% Profit/ Equity $’000 +1% Profit/ Equity $’000 –10% Profit/ Equity $’000 +10% Profit/ Equity $’000 Cash and cash equivalents 59,426 (416) 416 491 (402) Loans and receivables – Fixed interest rate Loss reserve Financial liabilities Payables Borrowings – Fixed interest rate – Floating interest rate Total increase/(decrease) 482,856 42,873 25,512 467,905 53,277 – (300) – – 373 (343) – 300 – – (373) 343 4,009 298 (3,280) (244) (99) 81 (4,548) – 151 3,721 – (124) The Parent entity for 2009 and 2008 had no exposures to interest rate risk and foreign exchange risk. 83 Credit risk Credit risk is the risk that a contracting party will not complete its obligations under a financial instrument and, as a result, cause the Group to incur a financial loss. The Group has exposure to credit risk on all financial assets included in its balance sheet. The Group’s maximum exposure to credit risk on its financial assets is its carrying amount. To manage retail credit risk, the Group has developed a comprehensive credit assessment process. Loans and receivables consist mainly of lease and loan contracts provided to consumer and commercial customers. Credit underwriting typically includes the use of either an application score-card and credit bureau report or a detailed internal risk profile review for each application, including a review of the customer against a comprehensive credit database. Internal credit review and verification processes are also used depending on the applicant. At origination, a credit assessment system along with information from two national credit bureaux determines the creditworthiness of applications based on the statistical interpretation of a range of application information (this is replaced by the detailed risk profile review for Certegy). These credit risk assessments are supported by reviews of certain applications by dedicated credit staff who apply the Group’s credit and underwriting policy within specific approval authorities. Portfolio performance and credit risk of new applications is monitored monthly by the Pricing, Risk and Credit Committee. The Group has a specialist collection function which manages all delinquent accounts. A primary measure of delinquency used by the Company is the proportion of contracts with an outstanding payment that is 30, 60 or 90+ days past due. For the purposes of measurement of past due amounts, an account is considered delinquent if it is overdue on a contractual payment by one day. The total principal owing on the contract is defined as the past due amount. Loans and receivables The Group’s lease and loan receivable balances are high volume low value lease and loan receivables advanced to individual customers and small businesses. In the vast majority of cases no externally assessed credit rating is available for these counterparties. The table below provides information about customer loans and receivables from customers by payment due status. Consolidated Parent Entity Contracts $’000 Contracts $’000 As at 30 June 2009 Unimpaired past due loans and receivables Past due under 30 days Past due 30 days to under 60 days Past due 60 days to under 90 days Past due 90 days and over 12,819 18,978 4,923 3,073 7,266 8,252 5,735 4,841 Total unimpaired past due loans and receivables 28,081 37,806 Total unimpaired loans and receivables 389,136 543,982 Unimpaired past due as a percentage of total unimpaired loans and receivables Unimpaired past due 30 days and over as a percentage of total unimpaired loans and receivables 6.9% 3.5% – – – – – 1 – – – – – 11,201 – – 84 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 39. Financial risk management (continued) Consolidated Parent Entity Contracts $’000 Contracts $’000 As at 30 June 2008 Unimpaired past due loans and receivables Past due under 30 days Past due 30 days to under 60 days Past due 60 days to under 90 days Past due 90 days and over 7,863 2,914 2,052 2,785 16,480 5,788 4,593 3,495 Total unimpaired past due loans and receivables 15,614 30,356 Total unimpaired loans and receivables 280,670 482,856 Unimpaired past due as a percentage of total unimpaired loans and receivables Unimpaired past due 30 days and over as a percentage of total unimpaired loans and receivables 6.3% 2.9% – – – – – 1 – – – – – 12,551 – – For impaired lease receivables, the Group has a right to recover the leased asset and for impaired loan receivables the Group, in certain instances, has access to collateral. Given the large number of small dollar accounts comprising the portfolio, it is not practical to assess the value of the collateral. The Group does not identify any individual loan and lease receivables as significant and individually impaired. It assesses impairment on a collective basis. The Group either writes off or recognises a 100% allowance for losses for all leases and loans more than 90 days past due. Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities and the availability of funding through an adequate amount of committed credit facilities. Surplus funds are only invested with licensed banks in the countries in which the Group operates. To mitigate against liquidity risk the Group maintains cash reserves and committed undrawn credit facilities to meet anticipated funding requirements for new business. In addition, the Group can redraw against its committed credit limits if the principal outstanding is reduced by contractual amortisation payments. Details of unused available loan facilities are set out in note 22. Amounts due to funders are repaid directly by rentals and repayments received from the Group’s customers. The table below analyses the Group’s financial liabilities into relevant maturity groupings. The amounts disclosed below are the contractual undiscounted cash flows. Less than 1 year $’000 1 to 2 years $’000 2 to 5 years $’000 5 years plus $’000 Total $’000 At 30 June 2009 – Consolidated Payables 31,487 – – Loans from financial institutions 343,591 199,638 106,051 At 30 June 2009 – Parent entity Payables Loans from financial institutions At 30 June 2008 – Consolidated Payables – – 25,512 – – – – – – – – – – – 31,487 649,280 – – 25,512 Loans from financial institutions 270,500 172,076 136,661 6,783 586,020 At 30 June 2008 – Parent entity Payables Loans from financial institutions – – – – – – – – – 85 Fair value of financial assets and financial liabilities The categories, carrying amount and fair value of financial assets and financial liabilities at the balance date are: 2009 Financial assets Cash and cash equivalents Loans and receivables Consolidated Parent entity Carrying amount $’000 Fair value $’000 Carrying amount $’000 Fair value $’000 52,583 52,583 – – 543,982 543,982 11,201 11,201 Investments in wholly-owned controlled entities – – 188,045 188,045 Financial liabilities Payables Borrowings (gross) – Fixed interest rate – Floating interest rate Loss reserve 2008 Financial assets Cash and cash equivalents Loans and receivables 31,487 31,487 486,011 487,333 105,473 105,473 (49,271) (49,271) – – – – – – – – Consolidated Parent entity Carrying amount $’000 Fair value $’000 Carrying amount $’000 Fair value $’000 59,426 59,426 – – 482,856 482,856 12,551 12,551 Investments in wholly-owned controlled entities – – 135,000 135,000 Financial liabilities Payables Borrowings (gross) – Fixed interest rate – Floating interest rate Loss reserve 25,512 25,512 467,905 456,929 53,277 53,277 (42,873) (42,873) – – – – – – – – Fair value estimation The fair value of financial assets and financial liabilities must be estimated for disclosure purposes. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Techniques, such as estimated discounted cash flows, are used to determine fair value for the financial instruments. The fair value of loan and lease receivables is estimated by discounting the future contractual cash flows at the current market interest rate that the Group charges for similar financial instruments. The nominal values less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. 86 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Notes to the Financial Statements continued 40. Deed of Cross Guarantee FlexiGroup Limited, FlexiGroup Subco Pty Limited, Flexirent Holdings Pty Limited, Flexirent Capital Pty Limited, Flexicare Claims Management Pty Limited and Certegy Ezi-Pay Pty Ltd are parties to a Deed of Cross Guarantee under which each company guarantees the debts of the others. By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare a financial report and Directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. (a) Consolidated income statement and a summary of movements in consolidated retained profits The above Companies represent a “Closed Group” for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by FlexiGroup Limited, they also represent the “Extended Closed Group”. Set out below is a consolidated income statement and a summary of movements in consolidated retained profits for the year ended 30 June 2009 of the Closed Group consisting of FlexiGroup Limited, FlexiGroup Subco Pty Limited, Flexirent Holdings Pty Limited, Flexirent Capital Pty Limited, Flexicare Claims Management Pty Limited and Certegy Ezi-Pay Pty Ltd. Revenue from continuing operations Borrowing costs Employee benefits expense Impairment losses on loans and receivables/(recoveries) Administration expenses Depreciation and amortisation expenses Communications and MIS expenses Marketing and travel expenses Profit before income tax Income tax expense Profit for the year Summary of movements in consolidated retained profits Retained profits at the beginning of the financial year Profit for the year Dividends provided for or paid Retained profits at the end of the financial year 2009 $’000 71,610 (1,232) 2008 $’000 59,097 (376) (33,604) (31,473) 435 (12,605) (4,792) (3,169) (3,276) 13,367 (4,010) 9,357 1,070 (7,933) (3,035) (2,032) (3,597) 11,721 (4,810) 6,911 33,060 9,357 50,071 6,911 (14,019) (23,922) 28,398 33,060 87 (b) Balance sheet Set out below is a consolidated balance sheet as at 30 June 2009 of the Closed Group consisting of FlexiGroup Limited, FlexiGroup Subco Pty Limited, Flexirent Holdings Pty Limited, Flexirent Capital Pty Limited, Flexicare Claims Management Pty Limited and Certegy Ezi-Pay Pty Ltd. Assets Current assets Cash and cash equivalents Receivables and customer loans Total current assets Non‑current assets Receivables and customer loans Plant and equipment Deferred tax assets Goodwill Other intangible assets Other financial assets Total non‑current assets Total assets Liabilities Current liabilities Payables Current tax liability Provisions Total current liabilities Non‑current liabilities Borrowings Deferred tax liabilities Provisions Total non‑current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained profits Total equity 2009 $’000 2008 $’000 29,527 18,337 47,864 11,425 4,119 4,320 79,875 14,088 3,968 34,174 21,914 56,088 10,172 3,720 4,299 50,159 7,707 923 117,795 76,980 165,659 133,068 66,471 45,060 3,636 929 8,238 620 71,036 53,918 15,000 – 15,268 521 30,789 101,825 63,834 38,307 (2,871) 28,398 63,834 14,750 332 15,082 69,000 64,068 34,272 (3,264) 33,060 64,068 88 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Directors’ Declaration 30 June 2009 In the Directors’ opinion: (a) the financial statements and notes set out on pages 41 to 87 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and (ii) giving a true and fair view of the Company’s and consolidated entity’s financial position as at 30 June 2009 and of their performance for the financial year ended on that date, and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable, and (c) at the date of this declaration, there are reasonable grounds to believe that the members of the Extended Closed Group identified in note 40 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue to the Deed of Cross Guarantee in note 40. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. Margaret Jackson Chairman Sydney 19 August 2009 Independent Auditor’s Report 89 PricewaterhouseCoopers ABN 52 780 433 757 Darling Park Tower 2 201 Sussex Street GPO BOX 2650 SYDNEY NSW 1171 DX 77 Sydney Australia Telephone +61 2 8266 0000 Facsimile +61 2 8266 9999 Independent auditor’s report to the members of FlexiGroup Limited Report on the financial report We have audited the accompanying financial report of FlexiGroup Limited (the Company), which comprises the balance sheet as at 30 June 2009, and the income statement, statement of changes in equity and cash flow statement for the period ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for both FlexiGroup Limited and the FlexiGroup Limited Group (the consolidated entity).The consolidated entity comprises the Company and the entities it controlled at the period’s end or from time to time during the financial period. Directors’ responsibility for the financial report The directors of the Company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 1(a), the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards ensures that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies with the financial report. Liability limited by a scheme approved under Professional Standards Legislation 90 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Independent auditor’s report continued Our audit did not involve an analysis of the prudence of business decisions made by directors or management. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: (a) the financial report of FlexiGroup Limited is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the Company’s and consolidated entity’s financial position as at 30 June 2009 and of their performance for the period ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the consolidated financial statements and notes/parent entity financial statements and notes also complies with International Financial Reporting Standards as disclosed in Note 1(a). Report on the Remuneration Report We have audited the Remuneration Report included in pages 17 to 33 of the directors’ report for the period ended 30 June 2009. The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s opinion In our opinion, the Remuneration Report of FlexiGroup Limited for the period ended 30 June 2009 complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers Victor Clarke Partner Liability limited by a scheme approved under Professional Standards Legislation Sydney 19 August 2009 91 Shareholder Information The shareholder information set out below was applicable as at 31 July 2009. A. Distribution of equity securities 1–1,000 1,001–5,000 5,001–10,000 10,001–100,000 100,001 and over Total Class of equity security Ordinary shares Options No of holders No of shares No of holders No of options 466 762 558 282,138 2,398,475 4,624,296 990 32,969,836 145 198,620,483 2,921 238,895,228 – – – – – – – – – – – – There were 39 holders of less than a marketable parcel of ordinary shares. B. Equity security holders Twenty largest quoted equity security holders. The names of the 20 largest holders of quoted equity securities are listed below: Name Ordinary shares Number held Percentage of issued shares % The Abercrombie Group Pty Ltd (formerly Eighth SRJ Pty Ltd) 71,134,417 29.78 UBS Wealth Management Australia Nominees Pty Ltd Pacific Custodians Pty Ltd Yoogalu Pty Ltd UBS Nominees Pty Ltd Mr Brendan Charles Behan and Mrs Dawn Helen Behan National Nominees Limited Citicorp Nominees Pty Limited (on trust for CFS Developing Companies) M F Custodians Ltd Suncorp Custodian Services Pty Limited J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited Marich Nominees Pty Ltd Certegy Australia Ltd Afianzar Pty Ltd Behan Superannuation Pty Ltd RBC Dexia Investor Services M Jackson Basildene Pty Ltd Sandhurst Trustees Ltd Total 12,859,983 10,947,500 10,819,300 6,763,272 6,300,000 5,549,513 5,420,664 3,877,861 3,710,196 3,679,293 3,085,439 3,033,216 3,000,000 2,602,381 2,550,000 2,300,000 2,138,978 1,448,856 1,427,517 5.38 4.58 4.53 2.83 2.64 2.32 2.27 1.62 1.55 1.54 1.29 1.27 1.26 1.09 1.07 0.96 0.90 0.61 0.60 162,648,386 68.09 92 FLEXIGROUP LIMITED FINANCIAL REPORT 2009 Shareholder information continued Unquoted equity securities Options and performance rights issued under the FlexiGroup Limited Long Term Incentive Plan to take up ordinary shares The Company has no other unquoted equity securities. C. Substantial holders Substantial holders in the Company are set out below: The Abercrombie Group Pty Ltd (formerly Eighth SRJ Pty Limited) as trustee of the Philadelphia Trust and Andrew Abercrombie Total D. Voting rights Number on issue Number of holders 17,721,829 40 Number held Percentage % 75,012,278 75,012,278 31.40 31.40 The voting rights attaching to equity securities are set out below: (a) Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. (b) Options No voting rights. Corporate Directory Directors Margaret Jackson (Chairman) John DeLano (Chief Executive Officer) Andrew Abercrombie Rajeev Dhawan R John Skippen Secretary David Stevens Notice of Annual General Meeting The Annual General Meeting of FlexiGroup Limited will be held at Sofitel Wentworth Sydney, 61 Phillip Street, Sydney at 4.00pm on 26 November 2009 Principal registered office in Australia Level 8, The Forum 201 Pacific Highway St Leonards NSW 2065 Australia Share Register Link Market Services Limited Level 12 680 George Street Sydney NSW 2000 Australia Auditor PricewaterhouseCoopers Darling Park Tower 2 201 Sussex Street Sydney NSW 1171 Australia Solicitors Mallesons Stephen Jaques Level 60, Governor Phillip Tower 1 Farrer Place Sydney NSW 2000 Australia Bankers Commonwealth Banking Corporation Stock Exchange listing FlexiGroup Limited shares are listed on the Australian Securities Exchange Website www.flexigroup.com.au u a . m o c . t c n c e r p i 

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